S-1 1 fs12019_phunwareinc.htm REGISTRATION STATEMENT

As filed with the Securities and Exchange Commission on February 5, 2019

Registration No. 333              

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

 

PHUNWARE, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   7374   26-4413774
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

 

 

7800 Shoal Creek Blvd, Suite 230-S

Austin, TX 78757

(512) 693-4199

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

 

 

 

Alan S. Knitowski

Chief Executive Officer

Phunware, Inc.

7800 Shoal Creek Blvd, Suite 230-S

Austin, TX 78757

(512) 693-4199

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

 

 

 

Copies to:

 

Scott K. Murano, Esq.

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

650 Page Mill Road

Palo Alto, CA 94304

(650) 849-3316

Matt Aune

Brendhan Botkin

Phunware, Inc.

7800 Shoal Creek Blvd, Suite 230-S

Austin, TX 78757

(512) 693-4199

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the “Securities Act”), 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(c) 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, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934. ☐

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

 

 

 

 

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

 
Common Stock, par value $0.0001 per share(1)   2,354,191   $172.70(10)  $406,568,785.70(10)  $49,276.14 
Common Stock, par value $0.0001 per share(2)   542,608   $172.70(10)  $93,708,401.60(10)  $11,357.46 
Common Stock, par value $0.0001 per share(3)   6,900,610   $172.70(10)  $1,191,735,347.00(10)  $144,438.32 
Common Stock, par value $0.0001 per share(4)   14,866   $6.15(11)  $91,409.09(11)  $11.08 
Common Stock, par value $0.0001 per share(5)   734,309   $9.83(11)  $7,218,831.45(11)  $874.92 
Common Stock, par value $0.0001 per share(6)   10,182,078   $12.12(11)  $123,356,893.18(11)  $14,950.86 
Warrants(7)   10,182,078    (12)   (12)   (12)
Common Stock, par value $0.0001 per share(8)   260,000   $12.12(11)  $3,149,926.00(11)  $381.77 
Warrants(9)   130,000    (12)   (12)   (12)

 

(1)Consists of (i) an aggregate of 2,003,403 outstanding shares of the registrant’s common stock initially issued to Astra Maritime Corp., Dominium Investments Inc., Magellan Investments Corp. and Firmus Investments Inc. (the “Sponsors”) and (ii) an aggregate of 350,788 outstanding shares of the registrant’s common stock issued to certain stockholders of the registrant upon exercise of Series F private placement warrants that were issued in connection with a private equity financing of Phunware, Inc. at a price of $9.22 per share.
(2)Consists of 542,608 shares of the registrant’s common stock issuable upon conversion of 6,000 shares of the registrant’s Series A preferred stock held by Dominion Capital LLC.
(3)Consists of 6,900,610 shares of the registrant’s common stock issuable upon exercise of certain warrants that were issued in the initial public offering of Stellar Acquisition III, Inc., the registrant’s legal predecessor prior to domestication as a Delaware corporation on December 26, 2018. Each such warrant currently is exercisable for one share of the registrant’s common stock at a price of $11.50 per share.
(4)Consists of 14,866 shares of the registrant’s common stock issuable upon exercise of certain Series D-1 private placement warrants that were issued in connection with a private equity financing of Phunware, Inc. Each such warrant currently is exercisable for one share of the registrant’s common stock at a price of $5.53 per share.
(5)Consists of 734,309 shares of the registrant’s common stock issuable upon exercise of certain Series F private placement warrants that were issued in connection with a private equity financing of Phunware, Inc. Each such warrant currently is exercisable for one share of the registrant’s common stock at a price of $9.22 per share.
(6)Consists of 10,182,078 shares of the registrant’s common stock issuable upon exercise of certain private placement warrants that were issued to the Sponsors in connection with the initial public offering of Stellar Acquisition III, Inc. and repayment of certain promissory notes. Each such warrant currently is exercisable for one share of the registrant’s common stock at a price of $11.50 per share.
(7)Consists of 10,182,078 warrants that are the private placement warrants that were issued to the Sponsors in a private placement that closed simultaneously with the closing of the initial public offering of Stellar Acquisition III, Inc. and as repayment of certain promissory notes. Each such warrant currently is exercisable for one share of the registrant’s common stock at a price of $11.50 per share.
(8)Consists of 260,000 shares of the registrant’s common stock issuable upon the exercise of certain unit purchase options (“UPOs”) purchased by the underwriters in connection with the initial public offering of Stellar Acquisition III, Inc. Each unit issuable upon exercise of the UPOs currently is exercisable for one share of the registrant’s common stock and one warrant with an exercise price per unit of $11.50.
(9)Consists of 130,000 warrants that are the warrants issuable to the underwriters in connection with the initial public offering of Stellar Acquisition III, Inc. upon exercise of the UPOs. Each such warrant currently is exercisable for one share of the registrant’s common stock at a price of $11.50 per share.
(10)Estimated solely for purposes of calculating the registration fee according to Rule 457(c) under the Securities Act based on the average of the high and low prices of the registrant’s common stock quoted on The Nasdaq Capital Market on January 29, 2019.
(11)Estimated solely for purposes of calculating the registration fee based on the average high and low prices of the registrant’s warrants quoted on The Nasdaq Capital Market on January 29, 2019 plus the applicable warrant exercise price per share.
(12)Pursuant to Rule 457(g) of the Securities Act, no separate fee is recorded for the warrants and the entire fee is allocated to the underlying common stock.

 

 

 

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 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.

 

 

 

 

 

 

EXPLANATORY NOTE

 

On December 26, 2018, Stellar Acquisition III, Inc., a Republic of the Marshall Islands corporation incorporated in December 2015 (“Stellar”), deregistered as a corporation in the Republic of the Marshall Islands and domesticated as a corporation incorporated under the laws of the State of Delaware upon the filing with and acceptance by the Secretary of State of Delaware of the certificate of domestication in accordance with Section 388 of the Delaware General Corporation Law (the “Domestication”). Upon the effectiveness of the Domestication, Stellar became a Delaware corporation and, upon the consummation of the Business Combination (as defined below), Stellar changed its corporate name to “Phunware, Inc.” (the “Successor”) and all outstanding securities of Stellar were deemed to constitute outstanding securities of the Successor. Also on December 26, 2018, STLR Merger Subsidiary Inc., a wholly-owned subsidiary of Stellar (“Merger Sub”), merged with and into Phunware, Inc. (“Phunware”), a corporation incorporated in Delaware in February 2009, with Phunware surviving the merger (the “Merger”) and becoming a wholly-owned subsidiary of the Successor (the “Business Combination”). Upon the consummation of the Business Combination, Phunware changed its corporate name to “Phunware OpCo, Inc.” As of the open of trading on December 28, 2018, the common stock and warrants of the registrant began trading on the Nasdaq Capital Market as “PHUN” and “PHUNW,” respectively.

 

 

 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS Subject to Completion February 5, 2019

 

20,988,662 Shares

 

10,312,078Warrants

 

 

This prospectus relates to shares of common stock, par value $0.0001 per share, of Phunware, Inc. and warrants to purchase common stock of Phunware, Inc. as described herein. The securities offered hereunder include (i) 2,354,191 outstanding shares of the Registrant’s common stock to be sold by selling securityholders named herein, (ii) 542,608 shares of the Registrant’s common stock issuable upon exercise of shares of the Registrant’s Series A preferred stock, (iii) 17,342,688 shares of the Registrant’s common stock issuable upon exercise of certain outstanding warrants and certain unit purchase options at $11.50 per share (including the initial issuance of such shares upon the exercise of such warrants and such unit purchase options and the subsequent resale of 10,442,078 of such shares by the selling securityholders named herein), (iv) 14,866 shares of the Registrant’s common stock issuable upon exercise of certain outstanding warrants at $5.53 per share (including the initial issuance of such shares upon the exercise of such warrants and the subsequent resale of all such shares by the selling securityholders named herein), (v) 734,309 shares of the Registrant’s common stock issuable upon exercise of certain outstanding warrants at $9.22 per share (including the initial issuance of such shares upon the exercise of such warrants and the subsequent resale of all such shares by the selling securityholders named herein) and (vi) 10,312,078 outstanding warrants to purchase shares of the Registrant’s common stock to be sold by the selling securityholders named herein.

 

We are registering the offer and sale of these securities to satisfy certain registration rights we have granted. We will not receive any of the proceeds from the sale of the securities by the selling securityholders. We will receive proceeds from warrants exercised in the event that such warrants are exercised for cash. We will pay the expenses associated with registering the sales by the selling securityholders, as described in more detail in the section titled “Use of Proceeds.”

 

The selling securityholders may sell the securities described in this prospectus in a number of different ways and at varying prices. We provide more information about how the selling stockholders may sell their securities in the section titled “Plan of Distribution.”

 

The selling securityholders may sell any, all or none of the securities and we do not know when or in what amount the selling securityholders may sell their securities hereunder following the effective date of this registration statement. In addition, certain of the securities registered hereunder are subject to contractual lock-up arrangements, which may cause any sale to be delayed until such restrictions terminate.

 

Our common stock is listed on The Nasdaq Capital Market (“Nasdaq”) under the symbol “PHUN”, and our warrants are listed on Nasdaq under the symbol “PHUNW”. On February 4, 2019, the last quoted sale price for our common stock as reported on Nasdaq was $250.00 per share and the last quoted sale price for our warrants as reported on Nasdaq was $0.84 per warrant.

 

We are an “emerging growth company,” as defined under the federal securities laws, and, as such, may elect to comply with certain reduced public company reporting requirements for future filings.

 

Investing in our securities involves a high degree of risk. Before buying any securities, you should carefully read the discussion of the risks of investing in our securities in “Risk Factors” beginning on page 6 of this prospectus.

 

You should rely only on the information contained in this prospectus or any prospectus supplement or amendment hereto. We have not authorized anyone to provide you with different information.

 

Neither the Securities Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is                              .

 

 

 

 

TABLE OF CONTENTS

 

  Page     Page
Prospectus Summary 1   Management 80
Risk Factors 6   Executive Compensation 88
Special Note Regarding Forward-Looking Statements 35   Certain Relationships, Related Party and Other Transactions 98
Background of Phunware 36   Principal and Selling Securityholders 103
Use of Proceeds 37   Description of Capital Stock 106
Market Price of and Dividends on Securities and Related Stockholder Matters 38   Plan of Distribution 124
Selected Historical Financial Data 39   Legal Matters 126
Management’s Discussion and Analysis of Financial Condition and Results of Operations 43   Experts 126
Business 68   Where You Can Find Additional Information 127
      Index to Financial Statements F-1

 

 

  

You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by us or on our behalf. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

The Phunware design logo and the Phunware mark appearing in this prospectus are the property of Phunware, Inc. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this prospectus.

 

i

 

PROSPECTUS SUMMARY

 

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our common stock. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

PHUNWARE, INC.

 

Phunware Inc. is a pioneer of Multiscreen-as-a-Service (“MaaS”) platform, a fully integrated enterprise cloud platform for mobile that provides companies the products, solutions, data and services necessary to engage, manage and monetize their mobile application portfolios and audiences at scale. According to comScore’s 2017 Mobile App Report, consumers spend 66% of their total digital time with mobile devices (smartphones and tablets), and 87% of their mobile time in mobile apps (vs. on mobile web). (Source: comScore 2017 Mobile App Report). Given this reality, brands must establish a strong identity on mobile, especially on devices and platforms specific to the Apple iOS and Google Android operating systems and ecosystems. We help brands define, create, launch, promote, monetize and scale their mobile identities as a means to anchor the digital transformation of their customers’ journeys and brand interactions. Our MaaS platform provides the entire mobile lifecycle of applications, media and data in one login through one procurement relationship.

 

Our MaaS platform allows for the licensing and creation of category-defining mobile experiences for brands and their application users worldwide. We have successfully expanded our addressable market reach into various important and fast-growing markets: mobile cloud software, media, data science and cryptonetworking. Since our founding in 2009, our goal has been to use our software platform within the application portfolios of the world’s largest companies and brands to create a massive database of proprietary Phunware IDs. Phunware IDs are unique identifiers assigned to a mobile device when it becomes first visible across our network of mobile application portfolios. We measure and accumulate Phunware IDs every month through queries that count unique devices that access our mobile application portfolio across our network of mobile applications that we have developed and/or support. The data collected from our Phunware IDs contributes to our data subscription services and application transaction revenue product lines by helping companies and brands boost campaign performance, target high-value users, maximize conversions and optimize spend.

 

We offer our platforms as Software-as-a-Service (“SaaS”) Data-as-a-Service (“DaaS”) and application transactions media. Our business model includes recurring subscriptions, reoccurring transactions and services, often as one-year to five-year software or data licenses, or transaction-based media insertion orders. We prioritize our sales and marketing efforts first on recurring SaaS and DaaS subscriptions, second on reoccurring transactions and third on services. In years in which transactional engagements are not expected to be attractive for gross margins, they are either avoided or pursued opportunistically only. Our target customers are enterprise companies with large digital, mobile, marketing and information technology budgets and spending that are enacting digital transformation in their businesses. These include companies from all vertical markets, including, for example, Fox Networks Group in Media & Entertainment, Cedars Sinai in Healthcare, Kohl’s in Retail, Wynn Resorts in Hospitality, Ft. Lauderdale Airport in Aviation, Brickell City Center in Real Estate, AT&T in Sports and the City of Las Vegas in Government.

 

CORPORATE INFORMATION

 

Phunware, Inc., a Delaware corporation, was originally incorporated in February 2009. On December 26, 2018, Stellar, deregistered as a corporation in the Republic of the Marshall Islands and domesticated as a corporation incorporated under the laws of the State of Delaware upon the filing with and acceptance by the Secretary of State of Delaware of the certificate of domestication in accordance with Section 388 of the Delaware General Corporation Law (the “DGCL”). Upon the effectiveness of the Domestication, Stellar became a Delaware corporation and, upon the consummation of the Business Combination, Stellar changed its corporate name to “Phunware, Inc.” and all outstanding securities of Stellar were deemed to constitute outstanding securities of the Successor. Also on December 26, 2018, Merger Sub merged with and into Phunware, with Phunware surviving the Merger and becoming a wholly-owned subsidiary of the Successor. Upon the consummation of the Business Combination, Phunware will change its corporate name to “Phunware OpCo, Inc.”

 

1

 

Our principal executive offices are located at 7800 Shoal Creek Blvd, Suite 230-S, Austin, TX 78757, and our telephone number is (512) 693-4199.

 

Our website address is www.phunware.com. The information on, or that can be accessed through, our website is not part of this prospectus.

 

We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.07 billion in annual revenues; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and December 31, 2020 (the last day of the fiscal year ending after the fifth anniversary of our initial public offering).

 

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not 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, we, 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 our financial statements with certain other public companies difficult or impossible because of the potential differences in accounting standards used.

 

Unless expressly indicated or the context requires otherwise, the terms “Phunware,” “Phunware, Inc.,” “PHUN,” “the Company,” “the Registrant,” “we,” “us” and “our” in this prospectus refer to the parent entity formerly named Stellar Acquisition III, Inc., after giving effect to the business combination, and as renamed Phunware, Inc., and where appropriate, our wholly-owned subsidiaries.

 

2

 

The Offering

 

Shares of Common Stock Offered by the Selling Securityholders Hereunder

An aggregate of 2,354,191 outstanding shares of the Registrant’s common stock (i) initially issued to Astra Maritime Corp., Dominium Investments Inc., Magellan Investments Corp. and Firmus Investments Inc. (the “Sponsors”), and (ii) held by certain stockholders of the Registrant issued upon exercise of certain Series F warrants of the Registrant (the “Series F Warrants”), offered pursuant to this prospectus.

 

542,608 shares of the Registrant’s common stock issuable upon conversion of the Registrant’s Series A 8% convertible preferred stock. Upon conversion and issuance, such shares of common stock may be offered for sale by the holders of the Series A 8% convertible preferred stock pursuant to this prospectus.

 

6,900,610 shares of the Registrant’s common stock issuable upon exercise of certain warrants that were issued by Stellar in its initial public offering (the “Public Warrants”). Each such warrant currently is exercisable for one share of the Registrant’s common stock at a price of $11.50 per share. Upon exercise and issuance, such shares of common stock will be freely tradeable under U.S. securities laws.

 

14,866 shares of the Registrant’s common stock issuable upon exercise of certain Series D-1 warrants issued to a stockholder of the Registrant (the “Series D-1 Warrants”). Each such warrant is currently exercisable for one share of the Registrant’s common stock at a price of $5.53 per share. Upon exercise and issuance, such shares of common stock may be offered for sale by the holder of the Series D-1 Warrant pursuant to this prospectus, notwithstanding any applicable contractual lock-up arrangements.

 

734,309 shares of the Registrant’s common stock issuable upon exercise of Series F Warrants issued to certain stockholders of the Registrant. Each such warrant currently is exercisable for one share of the Registrant’s common stock at a price of $9.22 per share. Upon exercise and issuance, such shares of common stock may be offered for sale by the holders of the Series F Warrants pursuant to this prospectus, notwithstanding any applicable contractual lock-up arrangements.

 

3

 

 

10,182,078 shares of the Registrant’s common stock issuable upon exercise of certain private placement warrants that were issued to the Sponsors in connection with Stellar’s initial public offering and repayment of Sponsor related party notes for extension costs (the “Sponsor Private Placement Warrants”). Each such warrant currently is exercisable for one share of the Registrant’s common stock at a price of $11.50 per share. Upon exercise and issuance, such shares of common stock may be offered for sale by the holders pursuant to this prospectus.

 

260,000 shares of the Registrant’s common stock issuable upon exercise of certain unit purchase options (the “UPOs”) that were issued to the underwriters in connection with Stellar’s initial public offering and the warrants underlying such UPOs. Each such unit currently is exercisable for one share of the Registrant’s common stock and one warrant exercisable for one share of the Registrant’s common stock at an exercise price of $11.50 per unit. Upon exercise and issuance, such shares of common stock may be offered for sale by the holders pursuant to this prospectus.

 
Warrants Offered by the Selling Securityholders
Hereunder

10,182,078 warrants to purchase shares of the Registrant’s common stock that are the Sponsor Private Placement Warrants issued to the Sponsors in a private placement that closed simultaneously with the closing of Stellar’s initial public offering. Each such warrant currently is exercisable for one share of the Registrant’s common stock at a price of $11.50 per share, offered pursuant to this prospectus.

 

130,000 warrants to purchase shares of the Registrant’s common stock that are the warrants issuable upon exercise of the UPOs (the “UPO Warrants”). Each such warrant currently is exercisable for one share of the Registrant’s common stock at a price of $11.50 per share, offered pursuant to this prospectus.

   
Use of Proceeds We will not receive any proceeds from the sale of our securities offered by the selling securityholders under this prospectus (the “Securities”).  We will receive up to an aggregate of approximately $206,293,447 from the exercise of the Sponsor Private Placement Warrants, the Public Warrants, the Series D-1 Warrants, the Series F Warrants and the UPO Warrants (collectively, the “Warrants”). To the extent that the Warrants are cashless (net) exercised, as applicable, or the Public Warrants are called by us for redemption, we would not receive such proceeds for the exercise of such Warrants. We expect to use the net proceeds from the exercise of the Warrants for general corporate purposes. See the section titled “Use of Proceeds.”

 

4

 

Common Stock Outstanding

27,605,570 shares prior to any exercise of the UPOs, the Warrants, or the Series A 8% convertible preferred stock.

 

46,262,574 shares after giving effect to the exercise of the UPOs, the Warrants and the Series A 8% convertible preferred stock.

   
Risk Factors See the section titled “Risk Factors” and other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.
   
Nasdaq symbol “PHUN” for our common stock and “PHUNW” for our warrants.

 

The number of shares of common stock outstanding is based 27,294,164 shares of common stock outstanding as of December 26, 2018 and excludes the following:

 

2,372,893 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock outstanding as of December 26, 2018, with a weighted-average exercise price of $0.41 per share;

 

18,131,221 shares of our common stock issuable upon the exercise of warrants and unit purchase options to purchase shares of our common stock outstanding as of December 26, 2018, with a weighted-average exercise price of $11.40 per share; and

 

5,375,251 shares of our common stock reserved for future issuance under our equity compensation plans, consisting of:

 

2,729,416 shares of our common stock to be reserved for future issuance under our 2018 Equity Incentive Plan (the “2018 Plan”);

 

2,372,893 shares of our common stock reserved for future issuance under our 2009 Equity Incentive Plan (the “2009 Plan”), which number of shares were added to the shares of our common stock reserved for future issuance under our 2018 Plan; and

 

272,942 shares of our common stock to be reserved for future issuance under our 2018 Employee Stock Purchase Plan (the “ESPP”).

 

Our 2018 Plan and ESPP each provide for annual automatic increases in the number of shares of common stock reserved thereunder. See the section titled “Executive Compensation—Employee Benefit and Stock Plans” for additional information.

 

5

 

RISK FACTORS

 

An investment in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information contained in this prospectus, including our consolidated financial statements and related notes, before deciding to invest in our securities. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business or results of operations.

 

Risks Related to Our Business, Operations and Industry

 

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.

 

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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.

 

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.

 

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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.

 

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;

 

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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.

 

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.

 

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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 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 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.

 

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;

 

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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.

 

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.

 

U.S. generally accepted accounting principles (“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, 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.

 

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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;

 

  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;

 

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  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.

 

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’s General Data Protection Regulation (“GDPR”) 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.

 

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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.

 

16

 

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.

 

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.

 

17

 

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.

 

18

 

We intend to raise capital to fund a Token Generation Event, pursuant to a Rule 506(c) of Regulation D offering by our wholly-owned subsidiary, PhunCoin, Inc. (“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 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, we have agreed to use commercially reasonable efforts to raise between $10 million and $100 million through a 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.

 

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. 

 

19

 

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.

 

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.

 

20

 

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.

 

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 Federal Trade Commission (“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.

 

21

 

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.

 

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.

 

22

 

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.

 

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.

 

23

 

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 Children’s Online Privacy Protection Act (“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.

 

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.

 

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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.

 

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.

 

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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.

 

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.

 

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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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act of 2002, 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 time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be adversely affected.

 

In addition, we expect these laws, rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain appropriate levels of coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly members to serve on our audit committee.

 

As a result of disclosure of information in this joint proxy statement/prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation by third parties. If such claims are successful, our business and results of operations could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the time and resources of our management and adversely affect our business and results of operations.

 

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Risks Related to this Offering, Capitalization Matters and Corporate Governance

 

The price of our common stock and warrants has been, and may continue to be, volatile, and you could lose all or part of your investment.

 

Technology stocks have historically experienced high levels of volatility. The trading price and volume of our common stock and warrants has fluctuated, and may continue to fluctuate following this offering, substantially due to a variety of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock and warrants include the following:

 

·price and volume fluctuations in the overall stock market from time to time;

 

·the announcement of new products, solutions or technologies, investments, commercial relationships, acquisitions or other events by us or our competitors;

 

·fluctuations in the trading volume of our shares or the size of our public float, especially considering that we became a publicly-listed company through the Business Combination with a special purpose acquisition company, and that the trading price of our common stock since the consummation of the Business Combination has been very volatile on a relatively low public float for our trading volume;

 

·changes in how customers perceive the benefits of our products and future offerings;

 

·the addition or departure of key personnel;

 

·the public’s reaction to our press releases, other public announcements and filings with the SEC;

 

·sales of large blocks of our common stock or warrants;

 

·developments concerning intellectual property rights;

 

·changes in legal, regulatory and enforcement frameworks impacting our products;

 

·variations in our and our competitors’ results of operations;

 

·whether our results of operations meet the expectations of securities analysts or investors;

 

·actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry;

 

·the failure of securities analysts to publish research about us, or shortfalls in our results of operations compared to levels forecast by securities analysts;

 

·actual or perceived significant data breach involving our products or website;

 

·litigation involving us, our industry or both;

 

·governmental or regulatory actions or audits;

 

·general economic conditions and trends;

 

·flash crashes,” “freeze flashes” or other glitches that disrupt trading on the securities exchange on which we are listed; and

 

·major catastrophic events in our domestic and foreign markets.

 

In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock and/or warrants could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock and warrants might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, results of operations and financial condition.

 

From December 28, 2018, the date our common stock began trading on Nasdaq, through February 4, 2019, the closing price of our common stock has ranged from $10.84 per share to $308.40 per share on an average trading volume of 8,687, and the closing price of our warrants has ranged from $0.22 per warrant to $0.84 per warrant on an average trading volume of approximately 373,000. From time to time, we may have volatility in our stock or warrant prices for reasons that are unknown to us.

 

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As of the date of this prospectus, our executive officers, directors and holders of 5% or more of our common stock collectively beneficially own over 50% of the outstanding shares of our common stock and continue to have substantial control over us, which will limit your ability to influence the outcome of important transactions, including a change in control.

 

As of the date of this prospectus, our executive officers, directors and each of our stockholders who own 5% or more of our outstanding common stock and their affiliates, in the aggregate, beneficially own over 50% of the outstanding shares of our common stock. As a result, these stockholders, if acting together, will be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

 

If securities or industry analysts do not publish or cease publishing research or reports about the Company, our business or our market, or if they change their recommendations regarding the our common stock adversely, the price and trading volume of our common stock could decline.

 

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

 

Sales of substantial amounts of our common stock in the public markets, or the perception that such sales could occur, could reduce the price that our common stock might otherwise attain.

 

Sales of a substantial number of shares of our common stock and warrants in the public market after this offering, or the perception that such sales could occur, could adversely affect the market price of our common stock and warrants and may make it more difficult for you to sell your common stock or warrants at a time and price that you deem appropriate.

 

At the consummation of the Business Combination, the Sponsors and our officers, directors and stockholders owning more than 1% of our outstanding equity immediately prior to the effective time of the Business Combination (each, a “Significant Stockholder”) is subject to a lock-up or such Significant Stockholder is otherwise subject to substantially similar transfer restrictions in favor of Phunware (the “Lock-Ups”). Pursuant to such Lock-Ups, each such holder agreed not to, during the period commencing from the consummation of the Business Combination and ending on the earlier of (A) the 180 days of the date of the consummation of the Business Combination and (B) the date after the consummation of the Business Combination on which we consummate a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of our stockholders having the right to exchange their equity holdings in Phunware for cash, securities or other property: (x) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any restricted securities, (y) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the restricted securities, or (z) publicly disclose the intention to do any of the foregoing, whether any such transaction described in clauses (x), (y) or (z) above is to be settled by delivery of restricted securities or other securities, in cash or otherwise. When the lock-up period in the Lock-Ups expires, the locked-up securityholders will be able to sell our shares in the public market.

 

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

 

We have never declared nor paid any cash dividends on our capital stock. However, our Series A Preferred Stock is redeemable at the holder’s option in an amount equal to 104% of the original purchase price for such shares. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. As a result, stockholders must rely on sales of their common stock after price appreciation as the only way to realize any future gains on their investment, if any.

 

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Delaware law and our certificate of incorporation and bylaws 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.

 

Our certificate of incorporation and bylaws and the DGCL contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors and therefore depress the trading price of our common stock and warrants. These provisions could also make it difficult for stockholders to take certain actions, including effecting changes in our management. Among other things, our 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 our board of directors;

 

·the ability of our 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;

 

·the limitation of the liability of, and the indemnification of, our directors and officers;

 

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

 

·the requirement that directors may only be removed from our 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 our board of directors, the chairperson of our board of directors, chief executive officer or 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 our certificate of incorporation or bylaws, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in our 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 our board of directors to amend the bylaws, which may allow our 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 our 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 our 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 Phunware.

 

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

 

In addition, as a Delaware corporation, we are subject to provisions of Delaware law, including Section 203 of the DGCL, which may generally prohibit certain stockholders holding 15% or more of our 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 our 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 our capital stock and could also affect the price that some investors are willing to pay for our common stock.

 

Our 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 us and our 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 our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, or employees.

 

Our certificate of incorporation provides that, unless we consent 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 Phunware, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee or agent to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or our certificate of incorporation or bylaws, (iv) any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws, or (v) any action asserting a claim against us 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 we consent 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 Exchange Act.

 

Our 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 us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm its results of operations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

 

These forward-looking statements include, but are not limited to, statements regarding our industry, future events, as well as post-closing management, our estimated or anticipated future results and benefits of following the transaction, including the post-transaction ownership and cash and debt balances, future opportunities for the combined company, estimates of our total addressable market, and projections of customer savings. These statements are based on various assumptions and on the current expectations of management and are not predictions of actual performance, nor are these statements of historical facts. These statements are subject to a number of risks and uncertainties regarding our business and the transaction, and actual results may differ materially. These risks and uncertainties include, but are not limited to, changes in the business environment in which we operate, including inflation and interest rates, and general financial, economic, regulatory and political conditions affecting the industry in which we operate; adverse litigation developments; inability to refinance existing debt on favorable terms; changes in taxes, governmental laws, and regulations; competitive product and pricing activity; difficulties of managing growth profitably; the loss of one or more members of our management team; failure to realize the anticipated benefits of the transaction, including difficulty in integrating the combined businesses; uncertainty as to the long-term value of Phunware, Inc. common stock; the inability to realize the expected amount and timing of cost savings and operating synergies; those discussed in the Annual Report on Form 10-K for the year ended November 30, 2017 under the heading “Risk Factors,” as updated from time to time by the Quarterly Reports on Form 10-Q and other documents of the predecessor entity and of us on file with the SEC or in the joint proxy statement/prospectus filed with the SEC by us dated as of November 13, 2018. There may be additional risks that we presently know or that we currently believe are immaterial that could also cause actual results to differ from those contained in the forward-looking statements. In addition, forward-looking statements provide our expectations, plans or forecasts of future events and views as of the date of this communication. We anticipate that subsequent events and developments will cause our assessments to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. These forward-looking statements should not be relied upon as representing our assessments as of any date subsequent to the date of this communication.

 

35

 

BACKGROUND OF PHUNWARE

 

Business Combination

 

On December 21, 2018, Stellar held a special meeting at which Stellar’s stockholders considered and approved, among other matters, the Merger Agreement. On December 26, 2018, Stellar deregistered as a corporation in the Republic of the Marshall Islands and domesticated as a corporation incorporated under the laws of the State of Delaware. Upon the effectiveness of the Domestication, Stellar became a Delaware corporation and, upon the consummation of the Business Combination (as defined below), Stellar changed its corporate name to “Phunware, Inc.” and all outstanding securities of Stellar were deemed to constitute outstanding securities of the Successor. Also on December 26, 2018, Merger Sub merged with and into Phunware, Inc., with Phunware surviving the Merger and becoming a wholly-owned subsidiary of the Successor. Upon the consummation of the Business Combination, Phunware changed its corporate name to “Phunware OpCo, Inc.” As of the open of trading on December 28, 2018, the common stock and warrants of Phunware, Inc. began trading on Nasdaq as “PHUN” and “PHUNW,” respectively.

 

In connection with the consummation of the Business Combination, holders of 1,813,487 shares of Stellar common stock sold in its initial public offering (“Public Shares”) exercised their right to redeem their Public Shares for cash at a price of $10.64 per share, for an aggregate amount of approximately $19.3 million. As a result of these redemptions, the Stellar trust account had approximately $0.4 million immediately prior to Closing.

 

In addition, 6,000 shares for aggregate cash proceeds of $6.0 million from the Series A 8% convertible preferred stock financing (“Series A Financing”) were issued in conjunction with the Business Combination. In connection with the Series A Financing, the Sponsors transferred an aggregate of 250,000 shares of Stellar common stock and 250,000 warrants to purchase shares of Stellar common stock to the Series A Financing investor, and 181,391 shares to certain service providers.

 

Immediately after giving effect to the Business Combination (including the redemptions and the issuance of shares in the Series A Financing, both described above), there were approximately 27.9 million shares of common stock and warrants to purchase approximately 18.2 million shares of common stock of Phunware issued and outstanding.

 

In addition, in connection with the consummation of the Business Combination, the Sponsors transferred to the former stockholders of Phunware 3,985,244 warrants to purchase shares of Stellar common stock, which shall mature on December 26, 2019. The Sponsors also transferred to Stellar 627,864 shares of Stellar common stock, which shall be retained in treasury and available for issuance from time to time by Stellar.

 

Upon consummation of the Business Combination, the former stockholders of Phunware owned approximately 92% of the issued and outstanding shares of common stock of the Successor. This percentage excludes the impact of outstanding stock options and warrants.

 

The Merger Agreement contains representations and warranties of the parties thereto, certain of which are limited by materiality and material adverse effect. The parties have also each agreed to certain covenants contained in the Merger Agreement. The representations, warranties and covenants of the parties contained in the Merger Agreement terminated at the Closing, notwithstanding that any covenant that, by its terms, provides for performance following the consummation of the Business Combination shall survive until such covenant is performed.

 

There is no accounting effect or change in the carrying amount of the consolidated assets and liabilities of the Successor as a result of the domestication. The Business Combination is accounted for as a reverse merger and recapitalization in accordance with GAAP. Accordingly, Stellar is the legal acquirer and Phunware is the accounting acquirer and predecessor whereby the Successor’s historical financial statements reflect the financial position, results of operations and cash flows of Phunware, and the net cash proceeds obtained from Stellar in the Business Combination is reflected as a capital infusion. Furthermore, the historical capitalization of Phunware immediately before the Business Combination was adjusted based on the exchange ratio of 0.459 Successor shares for every one share of Phunware capital stock.

 

36

 

USE OF PROCEEDS

 

All of the shares of common stock and warrants offered by the selling securityholders pursuant to this prospectus will be sold by the selling securityholders for their respective accounts. We will not receive any of the proceeds from the sale of the Securities hereunder. We will receive up to an aggregate of approximately $206,293,447 from the exercise of the Warrants. To the extent that the Warrants are cashless (net) exercised, as applicable, or the Public Warrants are called by us for redemption, we would not receive such proceeds for the exercise of such Warrants. In the event of a cashless (net) exercise of the Warrants, each holder would pay the exercise price by surrendering the Warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares underlying the Warrants, multiplied by the difference between the exercise price of the Public Warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of the 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 Warrants. We expect to use the net proceeds from the exercise of the Warrants for general corporate purposes.

 

With respect to the registration of the shares of our common stock held by Dominion, the selling securityholders will pay any underwriting discounts and commissions incurred by them in disposing of the Securities. We will bear all other costs, fees and expenses incurred in effecting the registration of the Securities covered by this prospectus, including, without limitation, all registration and filing fees, Nasdaq listing fees, printing expenses, messenger, telephone and delivery expenses, fees, fees and expenses of our counsel, expenses incurred by the selling securityholders for brokerage, accounting, tax or legal services or any other expenses incurred by the selling securityholders in disposing of the Securities.

 

With respect to the registration of all other shares of common stock and warrants offered by the selling securityholders pursuant to this prospectus, the selling securityholders will pay any underwriting discounts and commissions and expenses incurred by them for brokerage, accounting, tax or legal services or any other expenses incurred by them in disposing of the Securities. We will bear all other costs, fees and expenses incurred in effecting the registration of the Securities covered by this prospectus, including, without limitation, all registration and filing fees, Nasdaq listing fees and fees and expenses of our counsel and our independent registered public accountants.

 

37

 

MARKET PRICE OF AND DIVIDENDS ON SECURITIES AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

In connection with the business combination, the holders of Stellar’s public shares were permitted to elect to redeem their public shares for cash. Accordingly, holders of 1,813,487 Stellar common shares elected redemption at a price of approximately $10.64 per share, resulting in aggregate redemption payments of approximately $19.3 million. See the section titled “Background of Phunware” for additional information.

 

Following the business combination, our common stock and warrants began trading on Nasdaq under the symbols “PHUN” and “PHUNW,” respectively.

 

On February 1, 2019, there were approximately 442 stockholders of record of our common stock and 220 holders of record of our warrants. We believe the number of beneficial owners of our common stock and warrants are substantially greater than the number of record holders because a large portion of our outstanding common stock and warrants are held of record in broker “street names” for the benefit of individual investors. As of December 26, 2018, there were 27,294,164 common shares outstanding and 18,182,633 warrants outstanding.

 

We have not paid any cash dividends on our common stock to date. The payment of any cash dividends will be dependent upon our revenue, earnings and financial condition from time to time. The payment of any dividends will be within the discretion of our board of directors. It is presently expected that we will retain all earnings for use in our business operations and, accordingly, it is not expected that our board of directors will declare any dividends in the foreseeable future.

 

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SELECTED HISTORICAL FINANCIAL DATA

 

Selected Historical Financial 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 titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Phunware” appearing elsewhere in this prospectus. 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 nine months ended September 30, 2018 and 2017 and the consolidated balance sheet data as of September 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 September 30, 
   2018   2017 
Revenue        
Platform subscriptions and services  $4,349   $5,457 
Application transaction   866    1,970 
Total revenue  $5,215   $7,427 
Platform subscriptions and services as a percentage of total revenue   83.4%   73.5%
Application transactions as a percentage of total revenue   16.6%   26.5%
Gross Margin          
Platform subscriptions and services   44.6%   59.8%
Application transaction   65.5%   12.5%
Total gross margin   48.1%   47.3%

 

   Nine Months Ended
September 30,
 
   2018   2017 
Revenue        
Platform subscriptions and services  $14,801   $12,510 
Application transaction   9,579    9,075 
Total revenue  $24,380   $21,585 
Platform subscriptions and services as a percentage of total revenue   60.7%   58.0%
Application transactions as a percentage of total revenue   39.3%   42.0%
Gross Margin          
Platform subscriptions and services   51.5%   57.3%
Application transaction   84.7%   25.0%
Total gross margin   64.5%   43.8%

 

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   September 30,   December 31, 
   2018   2017 
Consolidated Balance Sheet Data:        
Cash   122    308 
Total assets   32,619    34,001 
Total liabilities   20,983    26,097 
Convertible preferred stock classified as temporary equity   116,968    107,405 
Total stockholders’ deficit   (105,332)   (99,501)

 

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)

 

40

 

Selected Historical Financial Data 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   $629,569 
Loss from operations   (1,421,213)   (629,569)
           
Other income          
Trust Account Investment income   659,361    368,766 
Net loss attributable to common shares   (761,852)  $(260,803)
Weighted average number of common shares outstanding (excluding shares subject to possible redemption)   2,840,600    2,723,800 
Basic and diluted net loss per share (excluding shares subject to possible redemption)   (0.27)  $(0.10)
           
Cash Flow Data:          
Net cash used in operating activities   (149,580)  $(191,017)
Net cash provided by (used in) investing activities   52,541,917    (88,766)
Net cash provided by (used in) financing activities   (52,490,319)   303,300 

 

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 

 

41

 

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 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 titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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 Successor.

 

   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 

 

42

   

PHUNWARE, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

Introduction

 

On December 26, 2018, Phunware, Inc (“Phunware”) and Stellar Acquisition III, Inc. (“Stellar”) announced the consummation of the transactions contemplated by the Agreement and Plan of Merger (as described below) (the “Business Combination”). In connection with the closing of the Business Combination, the registrant changed its name from Stellar Acquisition III, Inc. to Phunware, Inc (“Successor”).

 

References to “Pro Forma Transactions” include the Business Combination. Refer to Stellar Acquisition III, Inc. Form S-4 filed with the Securities and Exchange Commission on November 13, 2018.

 

Description of the Merger

 

On February 27, 2018, Stellar entered into an Agreement and Plan of Merger (“Merger Agreement”) with Phunware and Merger Sub. The Merger Agreement provides for the merger of Merger Sub with and into Phunware (the “Merger”), with Phunware continuing as the surviving corporation in the Merger.

 

In connection with the Business Combination, the holders of Phunware’s preferred stock converted all of their issued and outstanding shares of preferred stock into shares of Phunware common stock at a conversion ratio of one share of common stock for each share of preferred stock (the “Preferred Stock Exchange”). Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”): (i) all shares of Phunware common stock and preferred stock (the “Phunware Stock”) issued and outstanding immediately prior to the Effective Time (after giving effect to the Preferred Stock Exchange) converted into the right to receive the Stockholder Merger Consideration (as defined below); (ii) each outstanding warrant to acquire shares of Phunware Stock was cancelled, retired and terminated in exchange for the right to receive from the Successor a new warrant for 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, but with terms otherwise the same as the Phunware warrant (each, a “Replacement Warrant”); and (iii) each outstanding option to acquire Phunware Stock (whether vested or unvested) was assumed by the Successor 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 (each, an “Assumed Option”).

 

In connection with the Merger Agreement, Stellar redomesticated from a Republic of the Marshall Islands corporation into a Delaware corporation. Furthermore, at the consummation of the Business Combination, Phunware changed its corporate name to “Phunware OpCo, Inc.” and thereafter, Stellar changed its name to “Phunware, Inc.”

 

In connection to the consummation of the Business Combination, Phunware issued 6,000 shares to a single investor of Series A 8% convertible preferred stock (the “Preferred Stock”) with stated value of $1,000 per share for proceeds of $6 million. The Company deposited $5.5 million of the $6 million proceeds into a restricted escrow account in accordance with the securities purchase agreement entered into with the investor.

 

Merger Consideration

 

The aggregate merger consideration paid pursuant to the Merger Agreement to Phunware stockholders as of is equal to $301,000,000 (the “Merger Consideration”).

 

By default, the Merger Consideration to be paid to Phunware stockholders were paid in the form of a number shares of Successor common stock, valued at a price per share equal to the price at which each share of Stellar common stock is redeemed or converted 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 certificate of incorporation (the “Redemption”).

 

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In addition to the right to receive shares of Successor common stock as Stockholder Merger Consideration, each holder of Phunware Stock shall be entitled to elect to receive such holder’s pro rata share of 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 (the “Transferred Sponsor Warrants”). The number of shares of Successor common stock that a stockholder would otherwise be entitled to receive as part of the Merger Consideration shall be reduced by an amount equal to the value of the Transferred Sponsor Warrants that the Phunware stockholder elects to receive at $0.50 per warrant. In the event that there are any Transferred Sponsor Warrants that other holders of shares of Phunware Stock elect not to receive (the “Undersubscribed Sponsor Warrants”), each holder will also have the right to purchase up to its pro rata share of such Undersubscribed Sponsor Warrants. The shares of Successor common stock and the Transferred Sponsor Warrants to be transferred to Phunware stockholders are collectively referred to as “Stockholder Merger Consideration”.

 

As part of the Merger Consideration, holders of Phunware warrants will receive the Replacement Warrants and holders of Phunware options will receive the Assumed Options.

 

The per share Merger Consideration paid to Phunware Stockholders was 0.459 shares of Successor stock for each share of Phunware Stock.

 

Accounting for the Merger

 

The merger will be accounted for, in accordance with GAAP, as a “reverse merger” and recapitalization at the date of the consummation of the transaction since the stockholders of Phunware will own at least 50.1% of the outstanding common stock of Stellar immediately following the completion of the merger, Phunware will have its current officers assuming all corporate and day-to-day management offices of Stellar, including chief executive officer and chief financial officer, and board members appointed by Phunware will constitute a majority of the board of the Successor after the Business Combination. Accordingly, Phunware will be deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of Phunware. Accordingly, the assets and liabilities and the historical operations that will be reflected in the Stellar financial statements after consummation of the merger will be those of Phunware and will be recorded at the historical cost basis of Phunware. Stellar’s assets, liabilities and results of operations will be consolidated with the assets, liabilities and results of operations of Phunware upon consummation of the merger.

 

Basis of Pro Forma Presentation

 

The historical financial information has been adjusted to give pro forma effect to events that are related and/or directly attributable to the Business Combination, are factually supportable and are expected to have a continuing impact on the results of the Successor. The adjustments presented on the unaudited pro forma condensed combined financial statements have been identified and presented to provide relevant information necessary for an accurate understanding of the combined company upon consummation of the Business Combination.

 

The unaudited pro forma condensed combined financial information is for illustrative purposes only. The financial results may have been different had the companies always been combined. You should not rely on the unaudited pro forma condensed combined financial information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that the combined company will experience. Stellar and Phunware have not had any historical relationship prior to the Business Combination, except the notes receivable of an aggregate of $535,687 provided by Stellar to Phunware related to the extension paid to the trust from February 2018 thru November 2018. Accordingly, no pro forma adjustments were required to eliminate activities between the companies, other than the elimination of the notes receivable.

 

As a result of the Business Combination, Phunware stockholders will own approximately 86.3% of the Successor’s Common Stock to be outstanding immediately after the Business Combination, Stellar’s shareholders will own approximately 13.7% of Successor’s Common Stock based on the number of shares of Phunware’s Common and Preferred Stock outstanding as of September 30, 2018 (not giving effect to any shares issuable to them upon exercise of warrants).

 

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Included in the shares outstanding and weighted average shares outstanding as presented in the pro forma condensed combined financial statements are 25,774,227 shares of Common Stock to be issued to Phunware’s stockholders.

 

The following unaudited pro forma condensed combined balance sheet as of September 30, 2018 combines the unaudited historical consolidated balance sheet of Stellar as of August 31, 2018 with the unaudited historical condensed consolidated balance sheet of Phunware as of September 30, 2018, giving effect to the Business Combination as if it had been consummated as of that date.

 

The following unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2018 combines the unaudited historical condensed consolidated statement of operations of Stellar for the nine months ended August 31, 2018 with the unaudited historical condensed consolidated statement of operations of Phunware for the nine months ended September 30, 2018, giving effect to the Business Combination as if it had occurred as of the beginning of the earliest period presented.

 

The following unaudited pro forma condensed combined income statement for year ended December 31, 2017 combines the audited historical consolidated statement of income of Stellar for year ended November 30, 2017 with the audited historical consolidated statement of operations of Phunware for year ended December 31, 2017, giving effect to the Business Combination as if it had occurred as of the beginning of the earliest period presented.

 

The historical information of Phunware was derived from the unaudited condensed consolidated financial statements for the nine months ended September 30, 2018 and the audited consolidated financial statements for the year ended December 31, 2017, are included herein. The historical information of Stellar was derived from the unaudited condensed consolidated financial statements for the nine months ended August 31, 2018 and for the audited consolidated financial statements for the year ended December 31, 2017, are included herein.

 

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PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2018

(UNAUDITED)

(in thousands, except share amounts)

 

   (A)   (B)   (C)   (D)     
   Phunware   Stellar   Other Financing Transactions   Pro Forma Adjustments   Pro Forma Balance Sheet 
Assets                    
Current assets:                    
Cash  $122   $19   $(74)(1)  $418(6)  $774 
                   (308)(10)     
              500(5)          
Restricted Cash             5,500(5)        5,500 
Accounts receivable, net   4,160    -    -    -    4,160 
Prepaid expenses and other current assets   219    43    -    -    262 
Unsecured promissory note receivable - related parties   462         74(1)   (536)(8)   - 
Total current assets   4,963    62    6,000    (426)   10,599 
Cash and investments held in the Trust Account   -    19,489    112(2)          
              112(3)          
              (19,295)(4)          
                   (418)(6)   - 
Property and equipment, net   80    -    -    -    80 
Goodwill   25,846    -    -    -    25,846 
Intangible assets, net   604    -    -    -    604 
Non-current deferred tax assets   -    -    -    -    - 
Other assets   187    -    -         187 
Deferred financing costs   939              (939)(7)   - 
Total assets  $32,619   $19,551   $(13,071)  $(1,783)  $37,316 
Liabilities, convertible preferred stock, and stockholders’ equity (deficit)                         
Current liabilities:                         
Accounts payable  $6,938   $776   $-   $1,163(9)  $9,272 
                   (228)(10)     
                   623(11)     
Accrued expenses   2,960    -              2,960 
Deferred revenue   2,563    -    -    -    2,563 
Factor financing liability   2,071    -    -    -    2,071 
Warrant liability   450              1,276(12)     
                   (1,726)(13)   - 
Unsecured promissory notes - related parties   -    995    112(3)   (1,107)(8)   - 
Unsecured promissory notes - Phunware   -    424    112(2)   (536)(8)   - 
Advances - related party   -    70         (70)(10)   - 
Total current liabilities   14,982    2,265    224    (605)   16,866 
Deferred underwriting fees   -    463    (453)(4)   (10)(10)   - 
Deferred tax liabilities   387    -    -    -    387 
Deferred revenue   5,589    -    -    -    5,589 
Deferred rent   25    -    -    -    25 
Total liabilities   20,983    2,728    (229)   (615)   22,867 
Commitments and contingencies                         
Common stock subject to possible redemption   -    11,823    (11,823)(4)   -    - 
Convertible preferred stock   116,968    -         (116,968)(13)   - 
Redeemable, convertible preferred stock             6,000(5)   (623)(11)   5,377 
                          
Stockholders’ equity (deficit)                         
Common stock   8    -    -    (8)(13)     
                   3(13)   3 
Additional paid in capital   3,279    6,159    (6,159)(4)          
              (860)(4)   (418)(7)     
                   1,107(8)     
                   (790)(9)     
                   (1,983)(12)     
                   116,976(13)     
                   1,726(13)     
                   (1,159)(13)     
                   (3)(13)   119,858 
Accumulated other comprehensive loss   (390)   -    -    -    (390)
Accumulated deficit   (108,229)   (1,159)               
                   (521)(7)     
                   (373)(9)     
                   (1,276)(12)     
                   1,159(13)   (110,311)
Total stockholders’ equity (deficit)   (105,332)   5,000    (7,019)   116,423    9,072 
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)  $32,619   $19,551   $(13,071)  $(1,783)  $37,316 

 

46

 

Pro Forma Adjustments to the Unaudited Condensed Combined Balance Sheet

 

  (A) Derived from the unaudited consolidated balance sheet of Phunware as of September 30, 2018.

 

  (B) Derived from the unaudited condensed balance sheet of Stellar as of August 31, 2018.

 

  (C) Financing transactions occurring subsequent to the respective balance sheet dates but prior to the consummation of the Merger, including:

 

  (1) To record transactions related to the October 24, 2018 and November 24, 2018 extensions, whereby payments in the aggregate of $74 by Phunware were made in exchange for an unsecured promissory notes issued by Stellar. Stellar deposited the proceeds received from the note issuances in the Trust Account and accrued it in unsecured promissory notes – Phunware.
     
  (2) To record transactions related to September 24, 2018, October 24, 2018, and November 24, 2018 notes issued by Stellar (to Phunware), and deposited the proceeds received from the note issuances in the Trust Account and accrued it in unsecured promissory notes – Phunware.

 

  (3) To record extension payments to the Trust Account made by Stellar for September, October, and November 2018 in the aggregate of $112, and the related notes issued in unsecured promissory notes - related parties.
     
  (4) To record an aggregate of 1,813,487 share redemptions made by Stellar public shareholders at a price of $10.64 per share as of December 26, 2018 for total proceeds of $19,295. A portion of the funds used to redeem shares came from notes furnished by related parties that were subsequently attributed to additional paid-in-capital.
     
  (5) To reflect the issuance of Series A 8% convertible preferred stock, of which $5,500 is held in a restricted cash escrow account. The preferred stock is redeemable in cash at the following schedule: $3,000 plus dividends in 30 days from issuance; $2,500 plus dividends in 60 days from issuance; and $500 plus dividends in 90 days from issuance. The preferred shares are convertible at the option of the holder at a price of $11.50 per share, subject to adjustments for stock dividends, stock splits and other recapitalization type events and antidilutive events which would include subsequent issuances of equity or equity linked securities at prices more favorable than the conversion price of these preferred shares.

 

  (D) Pro forma adjustments relating to the consummation of the Merger, including:

 

  (6) To reflect the release of cash from investments held in the Trust Account.

 

  (7) To reflect the booking the reclassification of Phunware's deferred merger costs of $939, as a reduction of paid in capital to the extent of funds received at closing by liquidation of the trust, and to retained earnings to the extent above as a reduction of paid in capital.

 

  (8) To reflect the issuance of warrants issued to Stellar sponsors for the repayment of unsecured promissory notes and the elimination of note payable by Stellar to Phunware that originated in connection with funding the extension payment.

 

  (9) To reflect the booking of additional Phunware transaction costs of $373, and the assumption of $567 of additional Stellar transaction costs. Transaction costs include legal, financial advisory, and other closing costs not including transaction costs associated with the closing of the Series A financing.

 

  (10) To reflect the payment of deferred underwriting fees and other closing costs at closing

 

  (11) To reflect the booking of closing costs for Series A financing.

 

  (12) To adjust the fair value of Phunware Series F convertible preferred stock warrants that would be marked to market at the closing date of the merger.
     
  (13) To reflect the recapitalization of Phunware through the contribution of all the share capital in Phunware to Stellar, and the issuance of 25,774,227 shares of Common Stock to existing Phunware shareholders and the elimination of the historical accumulated deficit of Stellar, the legal acquirer. Pro forma weighted average shares outstanding, basic is 32,383,943 at September 30, 2018.

 

47

 

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 2018
(UNAUDITED)

(in thousands, except share amounts)

 

   (A)   (B)   Pro Forma   Pro Forma Statement of 
   Phunware   Stellar   Adjustments   Operations 
Net revenues  $24,380   $-   $-   $24,380 
Cost of revenues   8,643    -    -    8,643 
Gross profit   15,737    -    -    15,737 
Operating expenses:                    
Sales and marketing   4,573    -    -    4,573 
General and administrative   10,744    1,421    -    12,165 
Research and development   5,689    -    -    5,689 
Total operating expenses   21,006    1,421    -    22,427 
Operating loss   (5,269)   (1,421)   -    (6,690)
Other (expense) income:                    
Interest expense   (533)   -    -    (533)
Fair value adjustment for warrant liabilities   (54)   -    54(1)   - 
Fair value adjustment for digital currencies   (334)   -    -    (334)
Other income (expense)   (22)   660    (660)(2)     
              (2,170)(3)   (2,192)
Total other expense   (943)   660    (2,776)   (3,059)
Loss before taxes   (6,212)   (762)   (2,776)   (9,749)
Income tax benefit (expense)   -    -    -    - 
Net loss  $(6,212)  $(762)  $(2,776)  $(9,749)
Weighted average shares outstanding, basic        2,840,600    27,028,097(4)   29,868,697 
Basic net loss per share       $(0.27)       $(0.33)

  

48

  

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2017
(UNAUDITED)
(in thousands, except share amounts)

 

   (C)
Phunware
   (D)
Stellar
   Pro Forma Adjustments   Pro Forma Statement of Operations 
Net revenues  $26,722   $   $   $26,722 
Cost of revenues   15,714            15,714 
Gross profit   11,008            11,008 
Operating expenses:                    
Sales and marketing   10,721            10,721 
General and administrative   14,795    862        15,657 
Research and development   11,108            11,108 
Total operating expenses   36,624    862        37,486 
Operating loss   (25,616)   (862)       (26,478)
Other income (expense):                    
Interest expense   (397)           (397)
Fair value adjustment for warrant liabilities                
Impairment of digital currencies                
Other income (expense)   (13)   555    (555)(2)     
              (2,170)(3)   (2,183)
Total other income (expense)   (410)   555    (555)   (2,580)
Loss, before taxes   (26,026)   (307)   (555)   (29,058)
Income tax benefit (expense)   88            88 
Net loss  $(25,938)  $(307)  $(555)  $(28,970)
Weighted average shares outstanding, basic        2,737,367    27,028,097(4)   29,765,464 
Basic net loss per share       $(0.11)       $(0.97)

  

(4) Pro Forma Adjustments to the Unaudited Condensed Combined Income Statements

 

  (A) Derived from the unaudited consolidated statement of operations of Phunware for the six months ended September 30, 2018.

 

  (B) Derived from the unaudited consolidated statement of operations of Stellar for the nine months ended August 31, 2018.

 

  (C) Derived from the audited consolidated statements of operations of Phunware for the year ended December 31, 2017.

 

  (D) Derived from the audited consolidated statements of operations of Stellar for the year ended November 30, 2017.
     
    In conjunction with the Business Combination, the Company entered into at-will employment agreements with seven senior-level and executive employees. The annual base salaries were substantially the same amount in effect prior to the effectiveness of the employment agreement. Accordingly, no pro forma adjustment was required.

 

  (1) Represents an adjustment to eliminate the $54 valuation adjustment for the Phunware Series F convertible preferred stock warrants recorded by Phunware during the period.

 

49

 

  (2) Represents an adjustment to eliminate interest income and unrealized gain on marketable securities held in the Trust Account as of the beginning of the period.
  (3) Represents an adjustment to book additional transaction costs in excess of proceeds received from consummation of the Business Transaction.

 

  (4) As the Business Combination is being reflected as if it had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic net loss per share assumes that the shares issuable relating to the Business Combination have been outstanding for the entire period presented. If the maximum number of shares are redeemed, this calculation is retroactively adjusted to eliminate such shares for the entire period. Weighted average common shares outstanding basic are calculated as follows:

 

   Nine Months Ended   Year Ended 
   September 30,
2018
   December 31,
2017
 
Weighted average shares calculation, basic        
Stellar weighted average Public Shares outstanding   2,840,600    2,737,367 
Stellar representative shares   130,000    130,000 
Stellar shares subject to the redemption reclassified to equity   1,123,870    1,123,870 
Stellar shares issued in Business Combination   25,774,227    25,774,227 
Weighted average shares outstanding, basic   29,868,697    29,765,464 
Percent of shares owned by Phunware Holders   86.3%   86.6%
Percent of shares owned by Stellar holders   13.7%   13.4%

 

   Nine Months Ended   Year Ended 
   September 30,
2018
   December 31,
2017
 
Weighted average shares calculation, basic        
Existing Stellar Holders   4,094,470    3,991,237 
Phunware Holders   25,774,227    25,774,227 
Weighted average shares outstanding, basic   29,868,697    29,765,464 

 

50

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Phunware

 

References in this section to “we,” “us” or “the Company” refer to Phunware. References to “management” or “management team” refer to Phunware’s officers and directors.

 

The following discussion and analysis of Phunware’s financial condition and results of operations should be read in conjunction with Phunware’s consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Phunware’s actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed in the section titled “Risk Factors” and elsewhere in this prospectus.

 

Certain figures, such as interest rates and other percentages, included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.

 

Overview

 

Phunware Inc. is the pioneer of Multiscreen-as-a-Service (“MaaS”) platform, a fully integrated enterprise cloud platform for mobile that provides companies the products, solutions, data and services necessary to engage, manage and monetize their mobile application portfolios and audiences at scale. According to comScore’s 2017 Mobile App Report, consumers spend 66% of their total digital time with mobile devices (smartphones and tablets), and 87% of their mobile time in mobile apps (vs. on mobile web). (Source: comScore 2017 Mobile App Report) Given this reality, brands must establish a strong identity on mobile, especially on devices and platforms specific to the Apple iOS and Google Android operating systems and ecosystems. We help brands define, create, launch, promote, monetize and scale their mobile identities as a means to anchor the digital transformation of their customers’ journeys and brand interactions. Our MaaS platform provides the entire mobile lifecycle of applications, media and data in one login through one procurement relationship.

 

Our MaaS platform allows for the licensing and creation of category-defining mobile experiences for brands and their application users worldwide. We have successfully expanded our addressable market reach into various important and fast-growing markets: mobile cloud software, media, data science and cryptonetworking. Since our founding in 2009, our goal has been to use our software platform within the application portfolios of the world’s largest companies and brands to create a massive database of proprietary Phunware IDs. Phunware IDs are unique identifiers assigned to a mobile device when it becomes first visible across our network of mobile application portfolios. We measure and accumulate Phunware IDs every month through queries that count unique devices that access our mobile application portfolio across our network of mobile applications that we have developed and/or support. The data collected from our Phunware IDs contributes to our data subscription services and application transaction revenue product lines by helping companies and brands boost campaign performance, target high-value users, maximize conversions and optimize spend.

 

We offer our platforms as SaaS, DaaS and application transactions. Our business model includes recurring subscriptions, reoccurring application transactions and services, often as one-year to five-year software or data licenses, or transaction-based media insertion orders. We prioritize our sales and marketing efforts first on recurring SaaS and DaaS subscriptions, second on reoccurring transactions and third on application transactions. Our target customers are enterprise companies with large digital, mobile, marketing and information technology budgets and spending that are enacting digital transformation in their businesses. These include companies from all vertical markets, including, for example, Fox Networks Group in Media and Entertainment, Cedars Sinai in Healthcare, Kohl’s in retail, Ft. Lauderdale Airport in Aviation, Brickell City Center in Real Estate, AT&T in Sports and the City of Las Vegas in Government.

 

51

 

Acquisition History

 

We have a history of acquisitions enhancing our MaaS platform, media and data capabilities including GoTV Networks, Inc. in 2011; TapIt Media Group, Inc. in 2012; and 30 Second Software, Inc. (DBA Digby), Simplikate Systems, LLC and Odyssey Mobile Marketing, Ltd. in 2014. The purchase prices of acquired businesses have been allocated to the tangible and intangible assets acquired and liabilities assumed, based upon their estimated fair value at the date of purchase. The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill.

 

Most of the businesses we have acquired did not have a significant amount of tangible assets. The majority of our identifiable intangible assets from these acquisitions were from trade names, customer relationships and technology acquired. We utilized a third-party valuation firm to assist us in the valuation of the acquired intangibles and the resulting allocation of purchase price for all acquisitions. There are three basic approaches to determining the fair value of an asset: the income approach, the market approach and the cost approach. In making assumptions about valuation and useful lives, we considered the unique nature of each acquisition. As of December 31, 2017, we had $0.9 million in intangible assets (net of accumulated amortization) and $25.9 million in goodwill.

 

Application of these approaches involves the use of estimates, judgment and assumptions, such as future cash flows and selection of comparable companies. Future changes in our assumptions or the interrelationship of those assumptions may negatively impact future valuations. In the future, measurements of fair value and adverse changes in discounted cash flow assumptions could result in an impairment of goodwill or intangible assets that would require a non-cash charge to the combined consolidated statements of operations and may have a material effect on our financial condition and operating results.

 

Intangible assets, including trade names, customer relationships, and technology acquired are recorded at cost less accumulated amortization and our definite-lived intangibles are amortized using a method that reflects our best estimate of the pattern in which the economic benefit of the related intangible asset is utilized.

 

Intangible assets deemed to have indefinite useful lives are not amortized and are subject to impairment tests on an annual basis or whenever events or circumstances indicate impairment may have occurred. Impairment exists if the carrying value of goodwill or the indefinite-lived intangible asset exceeds its fair value. For other intangible assets subject to amortization, impairment is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the intangible asset.

 

We perform our annual impairment testing of goodwill and intangibles with indefinite lives as of October 1 of each year, and whenever events or circumstances indicate that impairment may have occurred. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or significant underperformance relative to expected historical or projected future results of operations.

 

We have determined that we have one reporting unit, and we have made assumptions about revenue, expenses, and growth rates, based on our forecasts, business plans, economic projections, anticipated future cash flows and marketplace data. To date, our tests have indicated that there have been no impairment of intangibles and no impairment of goodwill related to our business combinations.

 

We may choose in the future to expand by making acquisitions that could be material to the business. However, we do not have agreements or commitments for any further material acquisitions at this time. We cannot specify with certainty the particular uses for any acquisitions we have made or may make.

 

52

 

Key Business Metrics

 

Our management regularly monitors certain financial measures to track the progress of its business against internal goals and targets. We believe that the most important of these measures include backlog and deferred revenue and dollar-based revenue retention rate.

 

Backlog and Deferred Revenue. Backlog represents future amounts to be invoiced under our current agreements. We generally sign multiple-year platform subscriptions and services contracts and invoice an initial annual amount at contract signing followed by subsequent annual invoices. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice. Until such time as these amounts are invoiced, they are not recorded in revenues, deferred revenue, accounts receivable or elsewhere in our consolidated financial statements, and are considered by us to be backlog. We expect backlog to fluctuate up or down from period to period for several reasons, including the timing and duration of customer contracts, varying billing cycles and the timing and duration of customer renewals. We reasonably expect approximately half of our backlog as of September 30, 2018 and December 31, 2017 will be invoiced during the subsequent 12-month period, primarily due to the fact that our contracts are typically two to three years in length.

 

In addition, our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenues as of the end of a reporting period. The majority of our deferred revenue balance consists of platform subscription revenues that are recognized ratably over the contractual period. Together, the sum of deferred revenue and backlog represents the total billed and unbilled contract value yet to be recognized in revenues, and provides visibility into future revenue streams.

 

The following table sets forth the backlog and deferred revenue:

 

   Period Ended
September 30,
   Period Ended
December 31,
 
   2018   2017   2017   2016 
   (in thousands)   (in thousands) 
Backlog  $17,518   $24,933   $20,307   $15,660 
Deferred revenue   8,152    7,303    8,209    4,718 
Total backlog and deferred revenue  $25,670   $32,236   $28,516   $20,378 

 

Dollar-based Revenue Retention Rate, based on platform subscriptions and services revenue. Phunware calculated dollar-based revenue retention rate, based on platform subscriptions and services revenue, expressed as a percentage, by dividing (1) total revenue in the current 12-month period from those customers who were customers during the prior 12-month period by (2) total revenue from the customers in the prior 12-month period. Phunware believes that our ability to retain our customers and expand their use of our solutions over time is an indicator of the stability of our revenue base and the long-term value of our customer relationships. Our revenue retention rate provides insight into the impact on current period revenue of the number of new customers acquired during the prior 12-month period, the timing of our implementation of those new customers, growth in the usage of our solutions by our existing customers and customer attrition. If our revenue retention rate for a period exceeds 100%, this means that the revenue retained during the period including expansion and upsells more than offset the revenue that we lost from customers that did not renew their contracts during the period. Our revenue retention rate may decline or fluctuate as a result of a number of factors, including customers’ satisfaction or dissatisfaction with our platform, pricing, economic conditions or overall reductions in our customers’ spending levels.

 

The following table sets forth the dollar-based revenue retention rates:

 

   Period Ended
September 30,
   Period Ended
December 31,
 
   2018   2017   2017   2016 
Dollar-based revenue retention rate   97%   132%   141%   98%

 

53

 

Non-GAAP Financial Measures

 

Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA

 

Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA are non-GAAP financial measures. Management uses these measures (1) to compare operating performance on a consistent basis, (2) to calculate incentive compensation for its employees, (3) for planning purposes including the preparation of its internal annual operating budget, and (4) to evaluate the performance and effectiveness of operational strategies. Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating performance in the same manner as management.

 

For more information about Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA and a reconciliation of net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA, see the section titled “Selected Consolidated Financial and Other Data of Phunware—Use of Non-GAAP Financial Measures.”

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
   Year Ended
December 31,
 
   2018   2017   2018   2017   2017   2016 
   (in thousands )   (in thousands )   (in thousands ) 
Adjusted gross profit (1)  $2,533   $3,692   $15,808   $10,019   $11,771   $19,463 
Adjusted gross margin (1)   48.6%   49.7%   64.8%   46.4%   44.0%   41.1%
Adjusted EBITDA (2)  $(3,200)  $(8,181)  $(5,054)  $(18,486)  $(24,073)  $(13,462)

 

(1)  Adjusted Gross Profit and Adjusted Gross Margin are non-GAAP financial measures. We believe that Adjusted Gross Profit and Adjusted Gross Margin provide supplemental information with respect to margin regarding ongoing performance. We define Adjusted Gross Profit as total revenue less cost of revenue, adjusted to exclude stock-based compensation and amortization of intangible assets. We define Adjusted Gross Margin as Adjusted Gross Profit as a percentage of total revenue.

 

(2)  Adjusted EBITDA is a non-GAAP financial measure. We believe Adjusted EBITDA provides helpful information with respect to operating performance as viewed by management, including a view of our business that is not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of day-to-day operations. We define Adjusted EBITDA as net income (loss) plus (1) interest expense, (2) income tax benefit (expense), (3) depreciation, (4) amortization, and further adjusted for (5) stock-based compensation expense. The reconciliation of net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA for each of the periods presented is as follows. See “—Use of Non-GAAP Financial Measures” below for additional information.

 

The following tables present a reconciliation of Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA to gross profit and net loss, the most directly comparable financial measures calculated in accordance with GAAP:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
  

Year Ended

December 31,

 
   2018   2017   2018   2017   2017   2016 
   (in thousands)   (in thousands )   (in thousands ) 
Gross profit  $2,508   $3,510   $15,737   $9,445   $11,008   $18,542 
Add back: Amortization of intangibles   11    180    39    560    740    882 
Add back: Stock-based compensation   14    2    32    14    23    39 
Adjusted gross profit   2,533    3,692    15,808    10,019    11,771    19,463 
Adjusted gross margin   48.6%   49.7    64.8%   46.4    44.0%   41.1%

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
   Year Ended
December 31,
 
   2018   2017   2018   2017   2017   2016 
   (in thousands )   (in thousands )   (in thousands ) 
Net income (loss )  $(3,520)  $(8,713)  $(6,212)  $(19,877)  $(25,938)  $(16,297)
Add back: Depreciation and amortization   98    331    340    1,111    1,438    1,834 
Less : Interest expense   (148)   (177)   (533)   (195)   (397)   (686)
Less : Income tax benefit (expense)   -    -    -    -    88    (68)
EBITDA   (3,274)   (8,205)   (5,339)   (18,571)   (24,191)   (13,709)
Add Back: Stock-based compensation   74    24    285    85    118    247 
Adjusted EBITDA  $(3,200)  $(8,181)  $(5,054)  $(18,486)  $(24,073)  $(13,462)

 

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Use of Non-GAAP Financial Measures

 

Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue or net income (loss), as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations include;

 

  Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating its ongoing operating performance for a particular period;

 

  Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations, and;

 

  other companies in our industry may calculate Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.

 

We compensate for these limitations to Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA by relying primarily on its GAAP results and using Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA only for supplemental purposes. Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA include adjustments for items that may not occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other peer companies over time. For example, it is useful to exclude non-cash, stock-based compensation expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and these expenses can vary significantly across periods due to timing of new stock-based awards. We may also exclude certain discrete, unusual, one-time, or non-cash costs, including transaction costs and the income tax impact of adjustments in order to facilitate a more useful period-over-period comparison of its financial performance. Each of the normal recurring adjustments and other adjustments described in this paragraph help management with a measure of our operating performance over time by removing items that are not related to day-to-day operations or are non-cash expenses.

 

Components of Results of Operations

 

There are a number of factors that impact the revenue and margin profile of the services and technology offerings we provide, including, but not limited to, solution and technology complexity, technical expertise requiring the combination of products and types of services provided, as well as other elements that may be specific to a particular client solution.

 

Revenue and Gross Profit

 

Platform Subscriptions and Services Revenue. Subscription revenue is derived from software license fees, which comprise subscription fees from customers licensing our MaaS modules, which includes accessing the MaaS platform and/or MaaS platform data; application development service revenue from the development of customer applications, or apps, which are built and delivered to customers; and support fees, which comprise support and maintenance fees of their applications, software updates, and technical support for software products (post-contract customer support, or PCS) for an initial term. License subscription and app development arrangements are typically accompanied by support agreements, with terms ranging from 6 to 60 months and are non-cancelable, though customers typically have the right to terminate their contracts for cause if the Company materially fails to perform.

 

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We typically receive cash payments from customers in advance of when the PCS services are performed under the arrangements with the customer and records this as deferred revenue. These arrangements obligate us to provide PCS over a fixed term. We are unable to establish vendor-specific objective evidence (VSOE) of fair value for all undelivered elements in certain arrangements that include licenses, support, and services, due to the lack of VSOE for support bundled with the software license and application development. Because VSOE of fair value of the PCS included in the arrangement does not exist, the PCS cannot be accounted for separately from the software and customization efforts. Once the PCS period commences, we recognize revenue ratably over the remaining PCS period. In these instances, revenue is recognized ratably over the period that the services are expected to be performed, which is generally the support period.

  

From time to time, we also provide professional services by outsourcing employees’ time and materials to customers. Such amounts are typically recorded as the services are delivered.

 

Platform subscriptions and services gross profit is equal to subscriptions and services revenue less the cost of personnel and related costs for our support and professional services employees, external consultants, stock-based compensation and allocated overhead. Costs associated with our development and project management teams are generally recognized as incurred. As a result, platform subscriptions and services gross profit may fluctuate from period to period.

 

Application Transaction Revenue. We also generate revenue by charging advertisers to deliver advertisements (ads) to users of mobile connected devices. Depending on the specific terms of each advertising contract, we generally recognize revenue based on the activity of mobile users viewing these ads. Fees from advertisers are commonly based on the number of ads delivered or views, clicks, or actions by users on mobile advertisements delivered, and we recognize revenue at the time the user views, clicks, or otherwise acts on the ad. We sell ads through several offerings: cost per thousand impressions, cost per click, and cost per action. In addition, we generate application transaction revenue thru in-app purchases from application on our platform. At that time, services have been provided, the fees charged are fixed or determinable, persuasive evidence of an arrangement exists, and collectability is reasonably assured.

 

Application transaction gross profit is equal to application transaction revenue less cost of revenue associated with application transactions. Application transaction gross profit is impacted by the cost of direct premium, performance and network cost as well as based on the activity of mobile users viewing ads and marketing engagements through mobile applications. As a result, our application transaction gross profit may fluctuate from period to period due to variable activity of mobile users.

 

Gross Margin

 

Gross margin measures gross profit as a percentage of revenue. Gross margin is generally impacted by the same factors that affect changes in the mix of subscriptions and services and application transactions with generally higher gross margins coming from the sale of platform subscriptions and services.

 

Operating Expenses

 

Our operating expenses include sales and marketing expenses, general and administrative expenses, research and development expenses and amortization of acquired intangible assets.

 

Sales and Marketing Expense. Sales and marketing expense is comprised of compensation, commission expense, variable incentive pay and benefits related to sales personnel, along with travel expenses, other employee related costs, including share based compensation and expenses related to marketing programs and promotional activities. We immediately expense sales commissions related to acquiring new customers and expansion or upsells from existing customers.

 

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General and Administrative Expense. General and administrative expense is comprised of compensation and benefits of administrative personnel, including variable incentive pay and share-based compensation, bad debt expenses and other administrative costs such as facilities expenses, professional fees and travel expenses. Following the completion of this offering, we expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and listing standards of Nasdaq, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our general and administrative function to support the growth of our business. As a result, we expect that our general and administrative expenses will increase in absolute dollars but may fluctuate as a percentage of our total revenue from period to period.

 

Research and Development Expense. Research and development expenses consist primarily of employee compensation costs and overhead allocation. We believe that continued investment in our platform is important for our growth. We expect our research and development expenses will increase as our business grows.

 

Interest Expense and Other Income (Expense)

 

Interest expense and other income (expense) include interest expense associated with our outstanding debt and costs associated with this debt, which may include debt extinguishment cost and a factoring financing arrangement. We also may seek to finance strategic acquisitions in the future with the proceeds from additional debt incurrences, which may have an impact on its interest expense.

 

Income Tax Benefit (Expense)

 

We are subject to U.S. federal income taxes, state income taxes net of federal income tax effect and nondeductible expenses. Our effective tax rate will vary depending on permanent non-deductible expenses and other factors.

 

Results of Operations

 

The following tables set forth our consolidated financial data in dollar amounts and as a percentage of total revenue.

 

   Three Months Ended   Nine Months Ended   Year Ended 
   September 30,   September 30,   December 31, 
   2018   2017   2018   2017   2017   2016 
Net revenues  $5,215   $7,427   $24,380   $21,585   $26,722   $47,370 
Cost of revenues   2,707    3,917    8,643    12,140    15,714    28,828 
Gross profit   2,508    3,510    15,737    9,445    11,008    18,542 
Operating expenses :                              
Sales and marketing   1,241    2,935    4,573    8,623    10,721    12,832 
General and administrative   2,937    6,382    10,744    11,922    14,795    11,269 
Research and development   1,671    2,722    5,689    8,580    11,108    9,877 
Total operating expenses   5,849    12,039    21,006    29,125    36,624    33,978 
Operating loss   (3,341)   (8,529)   (5,269)   (19,680)   (25,616)   (15,436)
Other income (expense):                              
Interest expense   (148)   (177)   (533)   (195)   (397)   (686)
Fair value adjustment for warrant liabilities           (54)            
Impairment of digital currencies           (334)            
Other income (expense)   (31)   (7)   (22)   (2)   (13)   (107)
Total other income (expense)   (179)   (184)   (943)   (197)   (410)   (793)
Loss before taxes   (3,520)   (8,713)   (6,212)   (19,877)   (26,026)   (16,229)
Income tax benefit (expense)                   88    (68)
Net loss   (3,520)   (8,713)   (6,212)   (19,877)   (25,938)   (16,297)
Cumulative translation adjustment   (16)   43    (43)   117    127    (327)
Comprehensive loss  $(3,536)  $(8,670)  $(6,255)  $(19,760)  $(25,811)  $(16,624)

 

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   Three Months Ended   Nine Months Ended   Year Ended 
   September 30,   September 30,   December 31, 
   2018   2017   2018   2017   2017   2016 
Net revenues   100.0%   100.0%   100.0%   100.0%   100.0%   100.0 
Cost of revenues   51.9    52.7    35.5    56.2    58.8    60.9 
Gross profit   48.1%   47.3    64.5%   43.8%   41.2%   39.1 

 

Comparison of Three and Nine Months Ended September 30, 2018 and 2017

 

Revenue

 

   Three Months Ended
September 30,
   Change 
   2018   2017   Amount   % 
Revenue                
Platform subscriptions and services  $4,349   $5,457   $(1,108)   (20.3)%
Application transaction   866    1,970    (1,104)   (56.0)%
Total revenue  $5,215   $7,427   $(2,212)   (29.8)%
Platform subscriptions and services as a percentage of total revenue   83.4%   73.5%          
Application transactions as a percentage of total revenue   16.6%   26.5%          

 

   Nine Months Ended
September 30,
   Change 
   2018   2017   Amount   % 
Revenue                
Platform subscriptions and services  $14,801   $12,510   $2,291    18.3%
Application transaction   9,579    9,075    504    5.6%
Total revenue  $24,380   $21,585   $2,795    12.9%
Platform subscriptions and services as a percentage of total revenue   60.7%   58.0%          
Application transactions as a percentage of total revenue   39.3%   42.0%          

 

Total revenue decreased $2.2 million, or 29.8%, in the three months ended September 30, 2018 compared to the corresponding period in 2017. Subscription and services revenue decreased $1.1 million, or 20.3%, mainly related to a decrease in revenue from one significant customer. Application transaction revenue decreased $1.1 million, or 56%, mainly related to two customers who decreased or ceased running advertising campaigns with us.

 

Total revenue increased $2.8 million, or 12.9%, in the nine months ended September 30, 2018 compared to the corresponding period in 2017. Subscription and services revenue increased $2.3 million, or 18.3%, primarily driven by the fulfillment of contracts related to new customers. Application transaction revenue increased $0.5 million, or 5.6%, due to the Company being released from a revenue share liability of $6.3 million from an application transaction partner. However, the majority of this was offset by the loss of revenue due to decreased or ceased advertising campaigns.

 

Cost of Revenue, Gross Profit and Gross Margin

 

   Three Months Ended
September 30,
   Change 
   2018   2017   Amount   % 
Cost of Revenue                
Platform subscriptions and services  $2,408   $2,193   $215    9.8%
Application transaction   299    1,724    (1,425)   (82.7)%
Total cost of revenue  $2,707   $3,917   $(1,210)   (30.9)%
Gross Profit                    
Platform subscriptions and services  $1,941   $3,264   $(1,323)   (40.5)%
Application transaction   567    246    321    130.5%
Total gross profit  $2,508   $3,510   $(1,002)   (28.5)%
Gross Margin                    
Platform subscriptions and services   44.6%   59.8%          
Application transaction   65.5%   12.5%          
Total gross margin   48.1%   47.3%          

 

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   Nine Months Ended
September 30,
   Change 
   2018   2017   Amount   % 
Cost of Revenue                
Platform subscriptions and services  $7,176   $5,338   $1,838    34.4%
Application transaction   1,467    6,802    (5,335)   (78.4)%
Total cost of revenue  $8,643   $12,140   $(3,497)   (28.8)%
Gross Profit                    
Platform subscriptions and services  $7,625   $7,172   $453    6.3%
Application transaction   8,112    2,273    5,839    256.9%
Total gross profit  $15,737   $9,445   $6,292    66.6%
Gross Margin                    
Platform subscriptions and services   51.5%   57.3%          
Application transaction   84.7%   25.0%          
Total gross margin   64.5%   43.8%          

 

Total gross profit decreased $1.0 million, or 28.5%, in the three months ended September 30, 2018 compared to the corresponding period of 2017. Decrease related to lower margin in subscription and services revenue due to timing of completion and delivery of customer launches coupled with lower revenue as previously discussed. This was offset by $0.3 million increase in gross profit in application transaction business due to improvements in media spend purchasing.

 

Total gross profit increased $6.3 million, or 66.6%, in the nine months ended September 30, 2018 primarily attributable to an application transaction partner release the Company from its liability to them in the amount of $6.3 million.

 

Operating Expenses

 

   Three Months Ended
September 30,
   Change 
   2018   2017   Amount   % 
Operating expenses                
Sales and marketing  $1,241   $2,935   $(1,694)   (57.7)%
General and administrative   2,937    6,382    (3,445)   (54.0)%
Research and development   1,671    2,722    (1,051)   (38.6)%
Total operating expenses  $5,849   $12,039   $(6,190)   (51.4)%

 

   Nine Months Ended
September 30,
   Change 
   2018   2017   Amount   % 
Operating expenses                
Sales and marketing  $4,573   $8,623   $(4,050)   (47.0)%
General and administrative   10,744    11,922    (1,178)   (9.9)%
Research and development   5,689    8,580    (2,891)   (33.7)%
Total operating expenses  $21,006   $29,125   $(8,119)   (27.9)%

 

Sales and Marketing

 

Sales and marketing expense decreased $1.7 million, or (57.7%), and $4.1 million, or (47.0%), in the three and nine months ended September 30, 2018, respectively, compared to the corresponding periods of 2017 primarily due to lower commissions as a result of lower application transaction revenues and reduced employee compensation costs due to lower headcount.

 

General and Administrative

 

General and administrative expense decreased $3.4 million, or 54.0%, and $1.2 million, or 9.9%, in the three and nine months ended September 30, 2018, respectively, compared to the corresponding periods of 2017. The three-month decrease is attributable to bad debt charge in 2017 related to our litigation with Uber Technologies, Inc. (“Uber”), as described in detail in the section titled “Business—Legal Proceedings.” The nine-month decrease is related to the aforementioned bad debt charge, offset by an increase professional fees related to exploration of strategic alternatives leading up to the execution of the Merger and litigation related to the dispute with two customers.

 

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Research and Development

 

Research and development expense decreased $1.1 million, or (38.6%), and $2.9 million, or (33.7%), in the three and nine months ended September 30, 2018, respectively, compared to the corresponding periods of 2017 as a result of decreased employee and contract headcount dedicated to research and development initiatives.

 

Other income (expense)

 

   Three Months Ended September 30,   Change 
   2018   2017   Amount   % 
Other income (expense)                
Interest expense  $(148)  $(177)  $29    (16.4)%
Fair value adjustment for warrant liabilities   -    -    -    -%
Fair value adjustment for digital currencies   -    -    -    -%
Other income   (31)   (7)   (24)   342.9%
Total other income (expense)  $(179)  $(184)  $5    (2.7)%

 

   Nine Months Ended
September 30,
   Change 
   2018   2017   Amount   % 
Other income (expense)                
Interest expense  $(533)  $(195)  $(338)   173.3%
Fair value adjustment for warrant liabilities   (54)   -    (54)   -%
Fair value adjustment for digital currencies   (334)   -    (334)   -%
Other income   (22)   (2)   (20)   1,000.0%
Total other income (expense)  $(943)  $(197)  $(746)   378.7%

 

Interest expense decreased $29 thousand and increased $338 thousand in the three and nine months ended September 30, 2018, respectively, compared to the corresponding periods of 2017, primarily related to the amount of financing used under our factoring financing arrangement.

 

Other income (expense) increased $746 or $378.7% in the nine months ended September 30, 2018 compared to the corresponding period of 2017 primarily related to the increase in interest expense noted above as well as the impairment on digital currency recognized during the second quarter of 2018. The change in other income (expense) during the three months ended September 30, 2018 was not material.

 

Comparison of the years ended December 31, 2017 and 2016

 

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

 

   Year Ended December 31, 
   2017   2016 
   (in thousands) 
Consolidated Statement of Cash Flows:        
Net cash provided by (used in) operating activities  $(16,990)  $(10,604)
Net cash provided by (used in) investing activities   (27)   (27)
Net cash provided by (used in) financing activities   4,616    18,447 

 

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Operating Activities

 

Our primary source of cash from operating activities is receipts from the sale of our platform subscriptions and services and application transactions to our customers. Our primary uses of cash from operating activities are payments to employee for compensation and related expenses, publishers and other vendors for the purchase of digital media inventory and related costs, sales and marketing expenses and general operating expenses.

 

We utilized $17.0 million of cash from operating activities during 2017, primarily resulting from a net loss of $25.9 million, as adjusted for non-cash charges related to:

 

  Depreciation and amortization of $0.2 million;

 

  Stock-based compensation of $0.1 million;

 

  Allowance for doubtful receivables of $3.1 million; and

 

 

Amortization of acquired intangibles of $1.3 million.

 

In addition, during 2017 certain changes in our operating assets and liabilities resulted in significant cash increases (decreases) as follows:

 

  ($1.2) million from an increase in accounts receivable due to the timing of payments received;

 

  $3.5 million from an increase in deferred revenue;

 

  $3.0 million from an increase in accrued expenses; and

 

  ($0.9) million from a decrease in accounts payable and other accrued liabilities as a result of the timing of payments to our vendors.

 

We used $10.6 million of cash in operating activities during 2016, primarily resulting from a net loss of $16.3 million, as adjusted for non-cash charges related to:

 

  Depreciation and amortization of $0.3 million;

 

  Stock-based compensation of $0.2 million;

 

  Allowance for doubtful receivables of $0.1 million; and

 

  Amortization of acquired intangibles of $1.6 million.

 

In addition, certain changes in our operating assets and liabilities during 2016 resulted in significant cash increases (decreases) as follows:

 

  $0.2 million from a decrease in accounts receivable due to the timing of payments received;

 

  $0.6 million from an increase in deferred revenue;

 

  $3.0 million from an increase in accrued expenses and a reclassification of capital lease expense; and

 

  ($0.6) million from a decrease in accounts payable and other accrued liabilities as a result of the timing of payments to our vendors.

 

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Investing Activities

 

Our primary investing activities consist of purchases of office and computer equipment. Purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations and website and internal-use software and development.

 

Financing Activities

 

Our financing activities during 2017 consist primarily of the issuance of convertible preferred stock and our financing factoring agreement. We acquired $4.6 million of cash from financing activities during 2017, primarily as follows:

 

  $3.2 million provided by convertible preferred stock subscriptions;

 

  $1.0 million provided by net proceeds from our factoring financing agreement;

 

  $0.4 million of proceeds from the sale of convertible preferred stock shares; and

 

  ($0.1) million used in payments of capital leases.

 

We generated $18.5 million of cash from financing activities during 2016 primarily from the sale of convertible preferred stock and offset by use funds to repay a line of credit. Cash provided from financing activities during 2016 was primarily as follows:

 

  $0.8 million provided by net proceeds from our financing factoring agreement;

 

  ($4.3) million was utilized to repay a line of credit;

 

  $22.2 million of proceeds from the sale of convertible preferred stock; and

 

  ($0.2) million used in payments of capital leases.