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
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7374
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26-4413774
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(State
or other jurisdiction of
incorporation or organization)
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(Primary
Standard Industrial
Classification Code Number)
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|
(I.R.S.
Employer
Identification Number)
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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 ☐
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Accelerated filer ☐
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Non-accelerated filer ☐
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Smaller reporting company ☒
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Emerging
growth company ☒
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|
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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
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Amount to be
Registered
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Proposed Maximum
Offering Price per Share
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Proposed Maximum
Aggregate Offering Price
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Amount of
Registration Fee
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Common Stock, par value $0.0001 per share
(1)
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2,354,191
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$
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172.70
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(10)
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$
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406,568,785.70
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(10)
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$
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49,276.14
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Common Stock, par value $0.0001 per share
(2)
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542,608
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$
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172.70
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(10)
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$
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93,708,401.60
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(10)
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$
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11,357.46
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Common Stock, par value $0.0001 per share
(3)
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6,900,610
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$
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172.70
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(10)
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$
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1,191,735,347.00
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(10)
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$
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144,438.32
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Common Stock, par value $0.0001 per share
(4)
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14,866
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$
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6.15
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(11)
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$
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91,409.09
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(11)
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$
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11.08
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Common Stock, par value $0.0001 per share
(5)
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734,309
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$
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9.83
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(11)
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$
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7,218,831.45
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(11)
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$
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874.92
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Common Stock, par value $0.0001 per share
(6)
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10,182,078
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$
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12.12
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(11)
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$
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123,356,893.18
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(11)
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$
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14,950.86
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Warrants
(7)
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10,182,078
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—
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(12)
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—
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(12)
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—
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(12)
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Common Stock, par value $0.0001 per share
(8)
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260,000
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$
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12.12
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(11)
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$
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3,149,926.00
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(11)
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$
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381.77
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Warrants
(9)
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130,000
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—
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(12)
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—
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(12)
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—
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(12)
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(1)
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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.
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(2)
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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.
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(3)
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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.
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(4)
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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.
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(5)
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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.
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(6)
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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.
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(7)
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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.
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(8)
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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.
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(9)
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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.
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(10)
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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.
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(11)
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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.
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(12)
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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.
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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
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Subject
to Completion
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February 5,
2019
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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 wit
h
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
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.
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.”
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.
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.
|
|
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
.”
|
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:
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●
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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;
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●
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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
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●
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5,375,251
shares of our common stock reserved for future issuance under our equity compensation
plans, consisting of:
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○
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2,729,416
shares of our common stock to be reserved for future issuance under our 2018 Equity Incentive
Plan (the “2018 Plan”);
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|
○
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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
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|
○
|
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.
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.
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.
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:
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maintaining
high quality control and process execution standards;
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maintaining
planned resource utilization rates on a consistent basis;
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maintaining
productivity levels and implementing necessary process improvements;
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controlling
project costs;
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maintaining
close customer contact and high levels of customer satisfaction;
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recruiting
and retaining sufficient numbers of skilled IT professionals; and
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maintaining
effective customer relationships.
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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.
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:
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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;
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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;
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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;
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we
may encounter difficulties in, or may be unable to, successfully sell any acquired technology
offerings or services;
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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;
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the
challenges inherent in effectively managing an increased number of employees in diverse
locations;
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the
potential strain on our financial and managerial controls and reporting systems and procedures;
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the
potential known and unknown liabilities associated with an acquired company;
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our
use of cash to pay for acquisitions would limit other potential uses for our cash;
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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;
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the
risk of impairment charges related to potential write-downs of acquired assets or goodwill
in future acquisitions;
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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
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managing
the varying intellectual property protection strategies and other activities of an acquired
company.
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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.
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:
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changes
in spending on subscriptions, services and application transactions media offerings and services by our current or prospective
customers;
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pricing
our technology offerings and services effectively so that we are able to attract and retain customers without compromising
our operating results;
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attracting
new customers and increasing our existing customers’ use of our technology offerings and services;
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the
mix between new contracts and renewals;
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customer
renewal rates and the amounts for which agreements are renewed;
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seasonality
and its effect on customer demand;
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awareness
of our brand;
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changes
in the competitive dynamics of our market, including consolidation among competitors or customers and the introduction of
new technologies and technology enhancements;
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changes
to the commission plans, quotas and other compensation related metrics for our sales representatives;
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the
amount and timing of payment for operating expenses, particularly sales and marketing expense;
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our
ability to manage our existing business and future growth, domestically and internationally;
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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
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general
economic and political conditions in our domestic and international markets.
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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;
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changes
in the competitive dynamics of our market, including consolidation among competitors or customers;
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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;
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the
amount and timing of non-cash expenses, including stock-based compensation, goodwill impairments and other non-cash charges;
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the
amount and timing of costs associated with recruiting, training and integrating new employees;
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the
amount and timing of cash collections from our customers and the mix of quarterly and annual billings;
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introduction
and adoption of our marketing solutions in markets outside of the United States;
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unforeseen
costs and expenses related to the expansion of our business, operations and infrastructure;
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awareness
of our thought leadership and brand on a global basis;
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changes
in the levels of our capital expenditures;
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foreign
currency exchange rate fluctuations; and
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general
economic and political conditions in our domestic and international markets.
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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.
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.
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.
Our
global operations are subject to complex risks, some of which might be beyond our control.
Our
customers have operations across North and South America, Europe, Australia and Asia and other locations. Although international
revenue currently represents a small portion of our business, our revenue from customers outside of the United States may expand
in the future as we expand our international presence. As a result, we may be subject to risks inherently associated with international
operations, including risks associated with foreign currency exchange rate fluctuations, difficulties in enforcing intellectual
property and/or contractual rights, the burdens of complying with a wide variety of foreign laws and regulations, potentially
adverse tax consequences, tariffs, quotas and other barriers, potential difficulties in collecting accounts receivable, international
hostilities, terrorism and natural disasters. Expansion of international operations also increases the likelihood of potential
or actual violations of domestic and international anticorruption laws, such as the Foreign Corrupt Practices Act, or of U.S.
and international export control and sanctions regulations. We may also face difficulties integrating any new facilities in different
countries into our existing operations, as well as integrating employees that we hire in different countries into our existing
corporate culture. If we are unable to manage the risks of our global operations, our business, results of operations, or financial
condition could be adversely affected.
Economic
uncertainties or downturns in the general economy or the industries in which our customers operate could disproportionately affect
the demand for our marketing solutions and negatively impact our operating results.
General
worldwide economic conditions have experienced a significant downturn and fluctuations in recent years and market volatility and
uncertainty remain widespread. As a result, we and our customers find it extremely difficult to accurately forecast and plan future
business activities. In addition, these conditions could cause our customers or prospective customers to reduce their marketing
and sales budgets, which could decrease corporate spending on our marketing solutions, resulting in delayed and lengthened sales
cycles, a decrease in new customer acquisition and/or loss of customers. Furthermore, during challenging economic times, our customers
may face issues with their cash flows and with gaining timely access to sufficient credit or obtaining credit on reasonable terms,
which could impair their ability to make timely payments to us, impact customer renewal rates and adversely affect our revenue.
If such conditions occur, we may be required to increase our reserves, allowances for doubtful accounts and write-offs of accounts
receivable and our operating results would be harmed. In addition, a downturn in the technology sector may disproportionately
affect us because a significant portion of our customers are technology companies. We cannot predict the timing, strength or duration
of any economic slowdown or recovery, whether global, regional or within specific markets. If the conditions of the general economy
or markets in which we operate worsen, our business could be harmed. In addition, even if the overall economy does not worsen
or improves, the market for marketing software may not experience growth or we may not experience growth.
If
platform subscriptions renewal rates decrease, or we do not accurately predict subscription renewal rates, our future revenue
and operating results may be harmed.
Our
customers have no obligation to renew their subscriptions for our solutions after the expiration of their subscription period,
which is typically one year, but generally ranges from one to three years. In addition, our customers may renew for lower subscription
amounts or for shorter contract lengths. We may not accurately predict renewal rates for our customers. Our renewal rates may
decline or fluctuate as a result of a number of factors, including customer usage, pricing changes, number of applications used
by our customers, customer satisfaction with our service, increased competition, the acquisition of our customers by other companies
and deteriorating general economic conditions. If our customers do not renew their subscriptions for our solutions or decrease
the amount they spend with us, our revenue will decline and our business will suffer.
If
we are unable to attract new customers or sell additional services and functionality to our existing customers, our revenue growth
will be adversely affected.
To
increase our revenue, we must add new customers, encourage existing customers to renew their subscriptions on terms favorable
to us, increase their usage of our solutions and sell additional functionality and services to existing customers. As our industry
matures, as interactive channels develop further, or as competitors introduce lower cost and/or differentiated products or services
that are perceived to compete with ours, our ability to sell and renew based on pricing, technology and functionality could be
impaired. In addition, attracting, retaining and growing our relationship with enterprise customers may require us to effectively
employ different strategies than we have historically used with current customers and we may face challenges in doing so. As a
result, we may be unable to renew our agreements with existing customers or attract new customers or new business from existing
customers on terms that would be favorable or comparable to prior periods, which could have an adverse effect on our revenue and
growth.
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:
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timing of our customers’ budget cycles; and
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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.
We
require significant additional capital funding and such capital may not be available to us.
We
expect that our operating expenses will be higher than our net revenue for the foreseeable future, we currently lack sufficient
working capital and, as a standalone entity without giving effect to the Business Combination, we do not currently have financing
available to pay all liabilities as they are scheduled to come due in the next twelve months. We are working on several contingency
plans within our control to conserve existing liquidity through the reduction of discretionary expenses. We are also exploring
various alternatives including debt and equity financing vehicles, alternative offerings (launching an offering for a new token
pursuant to Rule 506(c) of Regulation D as promulgated under the Securities Act) strategic partnerships and the Business Combination.
Our
cash requirements relate primarily to our current negative working capital balance plus working capital needed to operate and
grow our business, including funding operating expenses and continued development and expansion of our services. We are currently
unable to fund our operations without additional external financing and therefore cannot sustain future operations, we may be
required to delay, reduce and/or cease our operations and/or seek bankruptcy protection. Although we have successfully raised
funds from investors in the past, no assurances can be made that we will be able to obtain sufficient additional capital to satisfy
the current negative working capital balances and future operations. Furthermore, if adequate additional funds are not available,
we will be required to delay, reduce the scope of, or eliminate material parts of the implementation of our business strategy,
including potential additional acquisitions or internally-developed businesses, which could seriously harm our business and operating
results.
Additionally,
even if we raise sufficient capital through additional equity or debt financings, strategic alternatives or otherwise, there can
be no assurance that the revenue or capital infusion will be sufficient to enable us to develop our business to a level where
it will be profitable or generate positive cash flow. If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders could be significantly diluted and these newly issued securities
may have rights, preferences or privileges senior to those of existing stockholders. If we incur additional debt, a substantial
portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting
funds available for our business activities. The debt holders would have rights senior to common stockholders to make claims on
our assets and the terms of any debt securities issued could also impose significant restrictions on our operations. Because our
decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we
cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our stockholders bear the risk of
our future securities offerings reducing the market price of our common stock and diluting their interest. Broad market and industry
factors may seriously harm the market price of our common stock, regardless of our operating performance and may adversely impact
our ability to raise additional funds. If we raise additional funds through collaborations and/or licensing arrangements, we might
be required to relinquish significant rights to our technologies, or grant licenses on terms that are not favorable to us.
We
intend to raise capital to fund a Token Generation Event, pursuant to a Rule 506(c) of Regulation D offering by 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.
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.
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.
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.
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.
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.
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:
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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;
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Faulty
or out-of-date algorithms that fail to properly process data or result in inability to capture brand-receptive audiences at
scale;
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Technical
or infrastructure problems causing digital video not to function, display properly or be placed next to inappropriate context;
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Inability
to control video completion rates, maintain user attention or prevent end users from skipping advertisements;
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Inability
to detect and prevent advertising fraud and other malicious activity;
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Inability
to fulfill audience guarantee or viewability requirements of advertiser customers;
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Inability
to integrate with third parties that measure campaigns against audience guarantee or viewability requirements;
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Unavailability
of campaign data for advertisers to effectively measure the success of their campaigns; and
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Access
to quality inventory at sufficient volumes to meet the needs of advertisers’ campaigns.
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Our
ability to deliver successful advertising campaigns also depends on the continuing and uninterrupted performance of our own internal
and third party managed systems, which we utilize to place ads, monitor the performance of advertising campaigns and manage advertising
inventory. Our revenue depends on the technological ability of our solutions to deliver ads and measure them. Sustained or repeated
system failures that interrupt our ability to provide solutions to customers, including security breaches and other technological
failures affecting our ability to deliver ads quickly and accurately and to collect and process data in connection with these
ads, could significantly reduce the attractiveness of our solutions to advertisers, negatively impact operations and reduce our
revenue. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages,
malicious human acts and natural disasters. In addition, any steps we take to increase the reliability and redundancy of systems
may be expensive and may not be successful in preventing system failures. Also, advertisers may perceive any technical disruption
or failure in ad performance on digital media properties’ platforms to be attributable to us and our reputation could similarly
suffer, or advertisers may seek to avoid payment or demand future credits for disruptions or failures, any of which could harm
our business and results of operations. If we are unable to deliver successful advertising campaigns, our ability to attract potential
advertisers and retain and expand business with existing advertisers could be harmed and our business, financial condition and
operating results could be adversely affected.
Our
business is subject to the risks of earthquakes, fires, floods and other natural catastrophic events and to interruption by man-made
problems such as computer viruses or terrorism.
Our
systems and operations are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications
failures, terrorist attacks, acts of war, human errors, break-ins and similar events. For example, a significant natural disaster,
such as a tornado, earthquake, mudslides, fire or flood, could have a material adverse effect on our business, results of operations
and financial condition and our insurance coverage may be insufficient to compensate us for losses that may occur. We have an
office and at least one data center located in California, a region known for earthquakes and mudslides. A significant amount
of our development and ad operations work is located in California. We also have corporate offices in Texas and Florida, both
of which are susceptible to floods and hurricanes. In addition, acts of terrorism, which may be targeted at metropolitan areas
that have higher population density than rural areas, could cause disruptions in our or our advertisers’ businesses or the
economy as a whole. Our servers may also be vulnerable to computer viruses, break-ins, denial-of-service attacks and similar disruptions
from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data. We may
not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting California, Texas
or Florida. As we rely heavily on our data centers, computer and communications systems and the internet to conduct our business
and provide high-quality customer service, such disruptions could negatively impact our ability to run our business and either
directly or indirectly disrupt our advertisers’ businesses, which could have a material adverse effect on our business,
results of operations and financial condition.
Activities
of our advertising customers with which we do business could damage our reputation or give rise to legal claims against us.
We
do not monitor or have the ability to control whether our advertising customers’ advertising of their products and solutions
complies with federal, state, local and foreign laws. Failure of our advertising customers to comply with federal, state, local
or foreign laws or our policies could damage our reputation and expose us to liability under these laws. We may also be liable
to third parties for content in the ads we deliver if the content involved violates copyrights, trademarks or other intellectual
property rights of third parties or if the content is defamatory, unfair and deceptive, or otherwise in violation of applicable
laws. A third party or regulatory authority may file a claim against us even if our advertising customer has represented that
its ads are lawful and that they have the right to use any copyrights, trademarks or other intellectual property included in an
ad. Any of these claims could be costly and time-consuming to defend and could also hurt our reputation within the advertising
industry. Further, if we are exposed to legal liability, we could be required to pay substantial fines or penalties, redesign
our business methods, discontinue some of our solutions or otherwise expend significant resources. Similarly, we do not monitor
or have the ability to control whether digital media property owners with which we do business are in compliance with applicable
laws and regulations, or intellectual property rights of others and their failure to do so could expose us to legal liability.
Third parties may claim that we should be liable to them for content on digital media properties if the content violates copyrights,
trademarks or other intellectual property rights of third parties or if the content is defamatory, unfair and deceptive, or otherwise
in violation of applicable laws or other brand protection measures. These risks become more pronounced as the digital video industry
shifts to programmatic buying.
Our
agreements with partners, employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.
We
rely in part on confidentiality agreements and other restrictions with our customers, partners, employees, consultants and others
to protect our proprietary technology and other proprietary information. These agreements may not effectively prevent disclosure
of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information.
Despite our efforts to protect our proprietary technology, processes and methods, unauthorized parties may attempt to misappropriate,
reverse engineer or otherwise obtain and use them. Moreover, policing unauthorized use of our technologies, products and intellectual
property is difficult, expensive and time-consuming, particularly in foreign countries where applicable laws may be less protective
of intellectual property rights than those in the United States and where enforcement mechanisms for intellectual property rights
may be weak. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights
and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
We
could be subject to additional income tax liabilities.
We
are subject to income taxes in the United States and certain foreign jurisdictions. We use significant judgment in evaluating
our worldwide income-tax provision. During the ordinary course of business, we conduct many transactions for which the ultimate
tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than
anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory
rates, by changes in currency exchange rates, by changes in the valuation of our deferred tax assets and liabilities or by changes
in the relevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in various
jurisdictions, and such jurisdictions may assess additional income tax against us. Although we believe our tax estimates are reasonable,
the final determination of tax audits and any related litigation could be materially different from our historical income-tax
provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows
in the period or periods for which that determination is made.
Our
international operations subject us to potential adverse tax consequences.
We
generally conduct our international operations through wholly owned subsidiaries and report our taxable income in various jurisdictions
worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer
pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree
with our determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur,
and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in
one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations.
Taxing
authorities may successfully assert that we should have collected or in the future should collect sales and use, value-added or
similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our operating
results.
We
do not collect sales and use, value-added or similar taxes in all jurisdictions in which we have sales, based on our belief that
such taxes are either not applicable or an exemption from such taxes applies. Sales and use, value-added and similar tax laws
and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes
are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in
the future, including as a result of a change in law. Such tax assessments, penalties and interest or future requirements may
adversely affect our business, financial condition and results of operations.
Our
net operating loss carryforwards may expire unutilized or underutilized, which could prevent us from offsetting future taxable
income.
We
may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S.
federal income tax purposes, including any limitations that may be imposed under Section 382 of the Code as a result of our past
ownership changes or an ownership change in connection with the Business Combination. At December 31, 2017, we had federal net
operating loss carryforwards of approximately $80 million, which expire at various dates beginning in 2030. At December 31, 2017,
we had state and local net operating loss carryforwards of approximately $29 million, which will begin to expire in 2030.
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.
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.
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.
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:
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price a
nd volume fluctuations
in the overall stock market from time to time;
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the
announcement of new products, solutions or technologies, investments, commercial relationships, acquisitions or other events by
us or our competitors;
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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;
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changes in how customers perceive the benefits of our products and
future offerings;
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the addition or departure of key personnel;
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the public’s reaction to our press releases, other public announcements
and filings with the SEC;
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sales of large blocks of our common stock or warrants;
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developments concerning intellectual property rights;
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changes in legal, regulatory and enforcement frameworks impacting
our products;
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variations in our and our competitors’ results of operations;
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whether our results of operations meet the expectations of securities
analysts or investors;
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actual or anticipated fluctuations in our quarterly and annual results
and those of other public companies in our industry;
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the failure of securities analysts to publish research about us, or
shortfalls in our results of operations compared to levels forecast by securities analysts;
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actual or perceived significant data breach involving our products
or website;
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litigation involving us, our industry or both;
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governmental or regulatory actions or audits;
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general economic conditions and trends;
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flash crashes,” “freeze flashes” or other glitches
that disrupt trading on the securities exchange on which we are listed; and
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major catastrophic events in our domestic and foreign markets.
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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.
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.
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 66
2
∕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.
|
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.
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.
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.
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.
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.
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
|
%
|
|
|
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
|
)
|
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
|
|
T
he
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
|
|
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”).
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).
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.
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
|
|
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.
|
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
|
)
|
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.
|
|
(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
|
|
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.
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.
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
|
%
|
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
|
)
|
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.
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.
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
|
)
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
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.
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
|
|
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.
|
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.
|
Off-Balance
Sheet Arrangements
During
2017 and 2016 and for the nine months ending September 30, 2018, we did not have any off-balance sheet arrangements, as defined
in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose
entities or variable interest entities.
Indemnification
Agreements
In
the ordinary course of business, we provide indemnifications of varying scope and terms to customers, vendors, lessors, business
partners and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such
agreements, solutions to be provided by us or from intellectual property infringement claims made by third parties. In addition,
we have entered into indemnification agreements with directors and certain officers and employees that will require us, among
other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors,
officers or employees.
Contractual
Obligations
We
lease various office facilities, including our corporate headquarters in Texas and offices in California and Florida, under non-cancellable
operating lease agreements that expire through 2020. The terms of the lease agreements provide for rental payments on a graduated
basis. We recognize rent expense on a straight-line basis over the lease periods. Rent expense under operating leases totaled
$0.5 million for each of the nine months ended September 30, 2018 and 2017. Rent expense under operating leases totaled $0.6 million
and $0.7 million for the years ended December 31, 2017 and 2016, respectively.
The
following table summarizes our contractual obligations as of December 31, 2017 (in thousands):
|
|
Payments due by period
|
|
Contractual obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More than
5 years
|
|
Operating Lease Obligations
|
|
$
|
1,260
|
|
|
$
|
689
|
|
|
$
|
571
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,260
|
|
|
$
|
689
|
|
|
$
|
571
|
|
|
|
—
|
|
|
|
—
|
|
Future minimum lease obligations years ended December 31,
|
|
Lease obligations
|
|
2018
|
|
$
|
689
|
|
2019
|
|
|
520
|
|
2020
|
|
|
51
|
|
2021
|
|
|
—
|
|
2022
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
1,260
|
|
Quantitative
and Qualitative Disclosures about Market Risk
We
are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our
financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result
of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading
purposes.
Foreign
Currency Risk
The
functional currency of our foreign subsidiaries is generally the local currency. Most of our sales are denominated in U.S. dollars,
and therefore our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated
in the currencies of the countries in which our operations are located, which are primarily in the U.S., the United Kingdom and
India. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign
currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. The Company typically
has nominal cash balances held in foreign accounts. To date, we have not entered into any hedging arrangements with respect to
foreign currency risk or other derivative financial instruments. During the fiscal years ended December 31, 2017 and 2016, and
the nine months ended September 30, 2018, the effect of a hypothetical 10% change in foreign currency exchange rates applicable
to our business would not have had a material impact on our consolidated financial statements.
Interest
Rate Sensitivity
We
have historically had no cash equivalents balances, only cash balances. In the future we expect our cash and cash equivalents
to be held in cash and short-term money market funds. Due to the short-term nature of these instruments, we believe that we will
not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.
Declines in interest rates, however, would reduce future interest income. During the fiscal years ended December 31, 2017 and
2016, and the nine months ended September 30, 2018, the effect of a hypothetical 10% increase or decrease in overall interest
rates would not have had a material impact on our interest income. A hypothetical increase or decrease in overall interest rates
is not expected to have a material impact on our interest expense.
Recent
Accounting Pronouncements
In
May 2014, the FASB and the International Accounting Standards Board jointly issued ASU No. 2014-09,
Revenue from Contracts
with Customers
(“ASC 606”), which supersedes the revenue recognition requirements in ASC 605,
Revenue Recognition
.
ASC 606 is a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance
under GAAP and International Financial Reporting Standards. The standard’s core principle is that a company will recognize
revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make
more estimates than under current authoritative guidance. These may include identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each
separate performance obligation.
This
standard is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years. There is a one-year deferral for non-public companies, but some companies that consider themselves private may have
to follow the public company effective date if they meet certain requirements. Early adoption is not permitted under GAAP, but
non-public companies may adopt the new standard as of the public entity effective date. This standard will impact those arrangements
historically accounted for under ASC 985-605. VSOE of fair value is not a requirement for separation under the new standard. As
a result, certain amounts required to be deferred under ASC 985-605 may be recognized as revenue sooner. 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. We adopted the new standard effective January 1, 2019. We are currently evaluating the financial statement impact,
if any, of the new revenue recognition standard on our consolidated financial statements.
In
2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
(“ASU
2015-17”), which eliminates the current requirement for organizations to present deferred tax liabilities and assets as
current and non-current in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets
and liabilities as non-current. ASU 2015-17 is effective for consolidated financial statements issued for annual periods beginning
after December 15, 2017. The amendments may be applied prospectively to all deferred tax liabilities and assets or retrospectively
to all periods presented. Effective January 1, 2018, we adopted this guidance on our consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(“Topic 842”). The core principle of Topic 842 is that
a lessee should recognize the assets and liabilities that arise from leases. For operating leases, a lessee is required to recognize
a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of
financial position. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by
class of underlying asset not to recognize lease assets and lease liabilities. The accounting applied by a lessor is largely unchanged
from that applied under previous generally accepted accounting principles. This ASU is effective for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years. Earlier application is permitted. In transition, lessees and
lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective
approach. We are currently evaluating the effect that the adoption of this ASU will have on our consolidated financial statements.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting
(“ASU 2016-09”). The amendment simplifies several aspects of the accounting for share-based
payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold
to qualify for equity classification up to the employees’ maximum statutory tax rates, allowing an entity-wide accounting
policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and
clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer
withholds shares for tax-withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. We have chosen to early
adopt ASU 2016-09 on a prospective basis. There was no material impact to our consolidated financial statements upon adoption.
Summary
of Significant Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that
affect the reported amounts in our consolidated financial statements and accompanying notes. Actual results could differ from
those estimates. Items subject to the use of estimates include revenue recognition for contract completion, useful lives of long-lived
assets including intangibles, valuation of intangible assets acquired in business combinations, reserves and certain accrued liabilities,
determination of the provision for income taxes, and fair value of equity instruments.
Revenue
Recognition
Revenue
is recognized when all four of the following criteria are met:
|
●
|
Persuasive evidence
of an arrangement exists;
|
|
●
|
The service has been
completed or services are actively being provided to the customer;
|
|
●
|
The amount of fees
to be paid by the customer is fixed or determinable; and
|
|
●
|
The collection of fees
is reasonably assured.
|
Platform
Subscriptions and Services Revenue
We
derive subscription revenue 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 we materially fail to perform.
These
application development, license and support fee arrangements represent software arrangements that are accounted for pursuant
to the software revenue recognition guidance of ASC 985-605,
Software — Revenue Recognition.
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 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.
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, on which advertisers are charged for each ad delivered to 1,000 consumers;
cost per click, on which advertisers are charged for each ad clicked or touched on by a user; and cost per action, on which advertisers
are charged each time a consumer takes a specified action, such as downloading an app. 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.
In
the normal course of business, we act as an intermediary in executing transactions with third parties. The determination of whether
revenue should be reported on a gross or net basis is based on an assessment of whether we are acting as the principal or an agent
in our transactions with advertisers. The determination of whether we are acting as a principal or an agent in a transaction involves
judgment and is based on an evaluation of the terms of each arrangement. While none of the factors individually are considered
presumptive or determinative in reaching a conclusion on gross versus net revenue recognition, we place the most weight on the
analysis of whether we are the primary obligor in the arrangement. To date, we have determined that we are the primary obligor
in all advertising arrangements because we are responsible for identifying and contracting with third-party advertisers, which
include both advertising agencies or companies; establishing the selling prices of the advertisements sold; performing all billing
and collection activities, including retaining credit risk; and bearing sole responsibility for the suitability and fulfillment
of the advertising. Accordingly, we act as the principal in all advertising arrangements and therefore reports revenue earned
and costs incurred related to these transactions on a gross basis.
We
record deferred revenue when it receives cash payments from advertiser clients in advance of when the services are performed under
the arrangements with the customer. We recognize deferred revenue as revenue only when the revenue recognition criteria are met.
Fair
Value of Financial Instruments
Authoritative
guidance on fair value measurements defines fair value, establishes a consistent framework for measuring fair value, and expands
disclosures for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair
value is an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions,
the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair
value as follows:
Level
1 — Observable inputs such as quoted prices in active markets.
Level
2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level
3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own
assumptions.
The
fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value.
The
carrying value of accounts receivable, prepaid expenses, other current assets, accounts payable, and accrued expenses are considered
to be representative of their respective fair values because of the short-term nature of those instruments.
Concentrations
of Credit Risk
Our
financial instruments that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable.
Although we limit our exposure to credit loss by depositing our cash with established financial institutions that management believes
have good credit ratings and represent minimal risk of loss of principal, our deposits, at times, may exceed federally insured
limits. Collateral is not required for accounts receivable, and we believe the carrying value approximates fair value.
The
following schedule sets forth our concentration of revenue sources as a percentage of total net revenues:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Customer A
|
|
|
60
|
%
|
|
|
55
|
%
|
|
|
39
|
%
|
|
|
40
|
%
|
Customer B
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
26
|
%
|
|
|
17
|
%
|
Customer C
|
|
|
0
|
%
|
|
|
10
|
%
|
|
|
0
|
%
|
|
|
5
|
%
|
The
following schedule sets forth the concentration of accounts receivable, net of specific allowances for doubtful accounts:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Customer A
|
|
|
51
|
%
|
|
|
24
|
%
|
Customer D
|
|
|
16
|
%
|
|
|
1
|
%
|
See
“Concentration of Credit Risk” in Note 2 to Phunware’s consolidated financial statements for further information.
Cash
We
consider all investments with a maturity of three months or less from the date of acquisition to be cash equivalents. We had no
cash equivalents at September 30, 2018 or December 31, 2017.
Accounts
Receivable and Reserves
Accounts
receivable are presented net of allowances. We consider receivables past due based on the contractual payment terms. We make judgments
as to its ability to collect outstanding receivables and records a bad debt allowance for receivables when collection becomes
doubtful. The allowances are based upon historical loss patterns, current and prior trends in its aged receivables, credit memo
activity, and specific circumstances of individual receivable balances.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets, generally ranging from three to seven years. Leasehold improvements
are amortized over the shorter of their useful lives or the remaining terms of the related leases.
Goodwill
and Intangible Assets
Goodwill
arises from purchase business combinations and is measured as the excess of the cost of the business acquired over the sum of
the acquisition-date fair values of tangible and identifiable intangible assets acquired, less any liabilities assumed.
In
accordance with ASC 350,
Intangibles — Goodwill and Other
, we do not amortize goodwill or intangible assets with
indefinite lives but rather assess their carrying value for indications of impairment annually, or more frequently if events or
changes in circumstances indicate that the carrying amount may be impaired.
The
goodwill impairment test required by ASC 350 is a two-step process. The first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of a reporting unit with its carrying amount, or the net book value of the company
or reporting unit, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting
unit is considered not impaired; thus, the second step of the impairment test is unnecessary. If the carrying amount of a reporting
unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment
loss, if any. We attribute goodwill to our sole reporting unit for impairment testing.
The
enterprise fair value used by us was derived from valuations utilizing a blending of both the income approach, whereby current
and future estimated discounted cash flows were utilized to calculate an operating value of the Company on a controlling interest
basis, and the market approach, whereby comparable company results are used to derive a fair value of the Company. The determination
of whether goodwill has become impaired involves a significant level of judgment in the assumptions underlying the approach used
to determine the value of the reporting unit. Changes in our strategy and/or market conditions could significantly impact these
judgments and require adjustments to recorded amounts of goodwill.
Identifiable
intangible assets consist of acquired trade names, customer lists, technology, in-process research and development, and order
backlog associated with the acquired businesses.
ASC
350 requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment
whenever events or changes in circumstances indicate that an asset’s carrying value may not be recoverable in accordance
with ASC 360,
Property, Plant, and Equipment
.
Amortization
of finite-lived intangible assets is calculated using either the straight-line or accelerated amortization model based on the
Company’s best estimate of the distribution of the economic value of the identifiable intangible assets. We did not recognize
any goodwill or intangible impairment losses in the nine months ending September 30, 2018 or for the years ended December 31,
2017 or 2016.
Long-Lived
Assets
In
accordance with authoritative guidance, we periodically re-evaluate the original assumptions and rationale utilized in the establishment
of the carrying value and estimated lives of all of our long-lived assets, including property and equipment. The determinants
used for this evaluation include management’s estimate of the asset’s ability to generate positive income from operations
and positive cash flow in future periods, as well as the strategic significance of the asset to our business objective. We did
not recognize any impairment losses during the nine months ending September 30, 2018 or for the years ended December 31, 2017
or 2016.
Leases
Leases
are reviewed and classified as capital or operating at their inception. For leases that contain rent escalations or periods during
the lease term where rent is not required, we recognize rent expense based on allocating the total rent payable on a straight-line
basis over the term of the lease excluding lease extension periods. The difference between rent payments and straight-line rent
expense is recorded as deferred rent on the consolidated balance sheets. Deferred rent that will be recognized during the succeeding
12-month period is recorded as the current portion of deferred rent and the remainder is recorded as long-term deferred rent.
Under
certain leases, we also receive incentives for leasehold improvements, which are recognized as deferred rent if we determine they
are owned by us. Leasehold improvement incentives are amortized on a straight-line basis over the shorter of the lease term or
estimated useful life as a reduction to rent expense. The leasehold improvements are included in property and equipment, net and
are amortized to depreciation expense.
Advertising
Costs
Advertising
costs are expensed as incurred and were included in sales and marketing expenses on the consolidated statements of operations
and comprehensive loss.
Retirement
Plan
We
administered one employee savings plan that qualified as a deferred salary arrangement under Section 401(k) of the Code. Under
the savings plan, participating employees may contribute a portion of their pretax earnings, up to the Internal Revenue Service
annual contribution limit. No employer matching contributions were made to the savings plan during the nine months ending September
30, 2018 or for the years ended December 31, 2017 or 2016.
Income
Taxes
We
account for income taxes in accordance with FASB ASC 740,
Income Taxes
. Under ASC 740, deferred tax assets and liabilities
reflect the future tax consequences of the differences between the financial reporting and tax bases of assets and liabilities
using current enacted tax rates. Valuation allowances are recorded when the realizability of such deferred tax assets does not
meet the more-likely-than-not threshold under ASC 740.
The
accounting guidance on accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute
criterion for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.
For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.
We have not recognized interest or penalties on our consolidated balance sheets or statements of operations and comprehensive
loss.
Non-Marketable
Equity Investment
During
December 2013, we invested $150 thousand for a non-controlling equity investment in a privately held company. Our investment in
the privately held company is reported using the cost method of accounting or marked down to fair value when an event or circumstance
indicates an other-than-temporary decline in value has occurred. During 2016, we determined an impairment of the investment existed.
As a result, we recorded a $75 thousand impairment charge, which is included in other expenses in our consolidated statement of
operations and comprehensive income. The net investment is recorded in other non-current assets on our consolidated balance sheet.
Comprehensive
Loss
We
utilize the guidance in ASC 220,
Comprehensive Income
, for the reporting and display of comprehensive loss and its components
in our consolidated financial statements. Comprehensive loss comprises net loss and cumulative foreign currency translation adjustments.
The accumulated comprehensive loss at September 30, 2018 and December 31, 2017 was due to foreign currency translation adjustments.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations of Stellar
References
in this section to “we,” “us” or the “Company” refer to Stellar, as applicable. References
to “management” or “management team” refer to Stellar’s officers and directors and references to
the “Sponsors” refer to holders of Stellar’s insider shares.
The
following discussion and analysis of Stellar’s financial condition and results of operations should be read in conjunction
with Stellar’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. Stellar’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
We
are a blank check company incorporated pursuant to the laws of the Republic of the Marshall Islands on December 8, 2015 for the
purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar Business Combination
with one or more businesses. We intend to effectuate our Business Combination using cash from the proceeds of a public offering
(the “Public Offering”) and a sale of Warrants in a private placement that occurred simultaneously with the completion
of the Public Offering (the “Private Placement Warrants”), our capital stock, debt or a combination of cash, stock
and debt.
On
February 27, 2018, Stellar entered into the Merger Agreement with Phunware, Inc., a Delaware company (“Phunware”)
and STLR Merger Subsidiary Inc., a Delaware corporation and a wholly-owned subsidiary of Stellar (“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. On or prior to the consummation of the transactions contemplated by the Merger Agreement
(the “Closing”), the holders of Phunware’s preferred stock will convert 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) will automatically be cancelled and cease to exist in exchange for the right to receive the Stockholder
Merger Consideration (as defined below), without interest; (ii) each outstanding warrant to acquire shares of Phunware Stock will
be cancelled, retired and terminated and cease to represent the right to acquire shares of Phunware Stock 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; and (iii) each outstanding option to acquire Phunware Stock (whether vested or unvested) shall
be 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.
On April 11, 2018, Stellar filed with the SEC a registration statement on Form S-4 in connection with the Business Combination.
On each of June 11, 2018, August 15, 2018, October 2, 2018 and November 6, 2018, the Company filed an amendment to the aforementioned
registration statement. Phunware anticipates having a shareholder vote and closing the transaction before the end of 2018.
The
Merger Agreement also provides that, immediately prior to the Effective Time, Stellar will convert from a Republic of the Marshall
Islands corporation to a Delaware corporation, whether by reincorporation, statutory conversion, merger or otherwise and in accordance
with the applicable provisions of the Republic of the Marshall Islands Associations Law, as amended, and the applicable provisions
of the DGCL (the “Conversion”). At the Closing, Stellar will change its name to “Phunware, Inc.”.
Phunware
Inc. offers its Multiscreen-as-a-Service (“MaaS”) platform, which is 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. Phunware’s MaaS platform provides the entire mobile lifecycle of applications,
media and data in one login through one procurement relationship. Its offerings include:
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Enterprise mobile
software including content management, location-based services, marketing automation, business intelligence and analytics,
alerts, notifications and messaging, audience engagement, audience monetization, vertical solutions and cryptonetworking,
as well as an Application Framework for developers and publishers building their own mobile applications in-house;
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Media for mobile
audience building and activation, application discovery, brand awareness, user engagement, user monetization and more; and
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Data for audience
insights, campaign engagement and business process optimization.
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Additionally,
Phunware plans to launch PhunCoin, a blockchain-powered token and ecosystem that enables consumers, brands and application developers
to transact directly and create a value-based and voluntary data exchange.
Under
the terms of the Merger Agreement, Phunware shareholders will receive consideration in the form of newly issued Stellar equity
securities, valued based on an enterprise value of $301 million for Phunware and subject to customary adjustments for cash and
debt and, at the election of Phunware’s shareholders, acquire from Stellar sponsors up to 3,985,244 but not less than 2,450,000
warrants to purchase Successor common stock in exchange for the Private Placement Warrants currently owned by the Sponsors at
$0.50 per warrant. In addition, all Phunware stock options and warrants will be assumed by Stellar in the transaction as part
of the merger consideration. Cash proceeds released from Stellar’s Trust Account after any shareholder redemptions and payment
of transaction expenses and other Stellar liabilities shall remain with the combined company, and Phunware intends to use the
cash proceeds from the Trust Account to grow its business, fund inorganic growth initiatives and for working capital.
The
issuance of additional shares of our stock in a Business Combination:
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may
significantly dilute the equity interest of our stockholders;
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may
subordinate the rights of holders of common stock if preferred stock is issued with rights
senior to those afforded our common stock;
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could
cause a change of control if a substantial number of shares of our common stock are issued,
which may affect, among other things, our ability to use our net operating loss carry
forwards, if any, and could result in the resignation or removal of our present officers
and directors;
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may
have the effect of delaying or preventing a change of control of us by diluting the stock
ownership or voting rights of a person seeking to obtain control of us; and
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may
decrease prevailing market prices for our common stock and/or Warrants.
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Similarly,
if we issue debt securities, it could result in:
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a
decrease in the prevailing market prices for our common stock and/or Warrants;
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default
and foreclosure on our assets if our operating revenues after an initial Business Combination
are insufficient to repay our debt obligations;
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acceleration
of our obligations to repay the indebtedness even if we make all principal and interest
payments when due if we breach certain covenants that require the maintenance of certain
financial ratios or reserves without a waiver or renegotiation of that covenant;
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our
immediate payment of all principal and accrued interest, if any, if the debt security
is payable on demand;
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our
inability to obtain necessary additional financing if the debt security contains covenants
restricting our ability to obtain such financing while the debt security is outstanding;
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our
inability to pay dividends on our common stock;
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using
a substantial portion of our cash flow to pay principal and interest on our debt, which
will reduce the funds available for dividends on our common stock if declared, expenses,
capital expenditures, acquisitions and other general corporate purposes;
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limitations
on our flexibility in planning for and reacting to changes in our business and in the
industry in which we operate;
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increased
vulnerability to adverse changes in general economic, industry and competitive conditions
and adverse changes in government regulation; and
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limitations
on our ability to borrow additional amounts for expenses, capital expenditures, acquisitions,
debt service requirements, execution of our strategy and other purposes and other disadvantages
compared to our competitors who have less debt.
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As
indicated in the accompanying consolidated financial statements, at August 31, 2018, the Trust Account consisted of U.S. treasury
bills yielding interest of approximately 1.9% per annum, with a total value of $19,487,416 and another $1,454 held as cash and
cash equivalents. We expect to incur significant costs in the pursuit of our acquisition plans. We cannot assure you that our
plans to complete our initial Business Combination will be successful.
Results
of Operations
For
the period from December 8, 2015 (inception) through August 31, 2018, our activities consisted of formation and preparation for
the Public Offering and subsequent to the Public Offering, and efforts directed toward locating and completing a suitable Business
Combination. Our operating costs for those periods include our search for a Business Combination and are largely associated with
our governance and public reporting, and charges of $10,000 per month payable to an affiliate of our Sponsor for administrative
services.
Liquidity
and Capital Resources
In
August 2016, we consummated the Public Offering of an aggregate of 6,500,000 units at a price of $10.00 per unit generating gross
proceeds of approximately $65,000,000 before underwriting discounts and expenses. Simultaneously with the consummation of the
Public Offering, we consummated the private placement of 7,650,000 Private Placement Warrants, each exercisable to purchase one
share of our common stock at $11.50 per share, to the Sponsor, at a price of $0.50 per Private Placement Warrant, generating gross
proceeds, before expenses, of approximately $3,825,000. We received net proceeds from the Public Offering and the sale of the
Private Placement Warrants of approximately $66,906,000, net of the non-deferred portion of the underwriting commissions of $1,300,000
and offering costs and other expenses of approximately $619,000. Following the partial exercise of the underwriters’ overallotment
option on September 28, 2016, the Company sold an additional 400,610 units at a price of $10.00 per unit generating gross proceeds
of approximately $4,006,100 before underwriting discounts and expenses. Simultaneously, the Sponsor purchased an additional 320,488
Private Placement Warrants at a price of $0.50 per Private Placement Warrant, generating gross proceeds, of approximately $160,244.
The non-deferred portion of the underwriting commissions paid by the Company amounted to $80,122, while the Company incurred additional
expenses related to the partial exercise of the overallotment option of $11,709. Of the aforementioned proceeds, $70,386,222 was
deposited in the Trust Account and is not available to us for operations (except amounts designated for working capital and amounts
to pay taxes and working capital). At August 31, 2018, we had approximately $19,223 of cash available outside of the Trust Account
to fund our activities to search for a Business Combination.
Until
the consummation of the Public Offering, the Company’s only sources of liquidity were an initial purchase of shares of our
common stock (“Founder Shares”) for $25,000 by Messrs. Tsirigakis and Syllantavos, and a total of approximately $208,000
loaned by three of the Company’s Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments Corp.
against the issuance of an unsecured promissory note (the “Note”). These loans were non-interest bearing and were
paid in full on August 24, 2016 in connection with the closing of the Public Offering.
On
August 24, 2017, the Company issued unsecured promissory notes (the “First Extension Notes”) in the aggregate amount
of $303,300 to three of the Company’s Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments Corp.,
affiliates of our co-CEOs, Mr. Prokopios (Akis) Tsirigakis, and of Mr. George Syllantavos. The Trust Account was funded properly
for the extension. These funds, which were deposited into the Trust Account, were used to extend the period of time the Company
has to consummate a business combination by three months to November 24, 2017.
On
November 23, 2017, the Company issued unsecured promissory notes (the “Second Extension Notes”) in the aggregate amount
of $301,000 to three of the Company’s Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments Corp.,
affiliates of our co-CEOs, Mr. Prokopios (Akis) Tsirigakis, and of Mr. George Syllantavos. These funds, which were deposited into
the Trust Account, were used to extend the period of time the Company has to consummate a business combination by three months
to February 24, 2018.
On
February 23, 2018, the Company issued unsecured promissory notes in the aggregate amount of $167,100 to three of the Company’s
Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments Corp., affiliates of our co-CEOs, Mr. Prokopios
(Akis) Tsirigakis, and of Mr. George Syllantavos. Additionally, on February 22, 2018, the Company issued a promissory note in
the aggregate amount of $201,268 to Phunware. The aggregate funds from the four aforementioned promissory notes (in aggregate
the “Third Extension Notes”), which were deposited into the Trust Account, were used to extend the period of time
the Company has to consummate a business combination by three months to May 24, 2018.
On
May 22, 2018, Stellar’s shareholders approved an amendment to its extending the date by which Stellar must consummate its
initial business combination to August 24, 2018. Concurrently, 3,353,060 Public Shares exercised their right to redeem such Public
Shares. An aggregate $34,787,998 was removed from Stellar’s Trust Account to pay such redemptions. These redemptions thus
caused the balance of the Trust Account to fall below the Minimum Cash Asset Level as defined in the Merger Agreement. On each
of May 22, 2018, June 22, 2018, and July 23, 2018, Stellar issued unsecured promissory notes in the aggregate amount of $62,082
each time to three of the Company’s Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments Corp.,
affiliates of our co-CEOs, Mr. Prokopios (Akis) Tsirigakis, and of Mr. George Syllantavos. Additionally, on each of May 22, 2018,
June 22, 2018, and July 23, 2018, the Company issued promissory notes in the aggregate amount of $62,082 each time to Phunware
(in aggregate the “Fourth Extension Notes”).
On
August 22, 2018, Stellar’s shareholders approved an amendment to the Company’s Second Amended and Restated Articles
of Incorporation, extending the date by which Stellar must consummate its initial business combination to December 26, 2018. Concurrently,
1,695,830 Public Shares exercised their right to redeem such Public Shares. An aggregate $17,772,298 was removed from Stellar’s
Trust Account to pay for such redemptions. On each of August 23, 2018, and September 24, 2018, Stellar issued unsecured promissory
notes in the aggregate amount of $37,034 to three of the Company’s Sponsors, Firmus Investments Inc., Astra Maritime, Inc.
and Magellan Investments Corp., affiliates of our co-CEOs, Mr. Prokopios (Akis) Tsirigakis, and of Mr. George Syllantavos. Additionally,
on each of August 23, 2018, and September 24, 2018, the Company issued promissory notes in the aggregate amount of $37,034 each
time to Phunware (collectively the “Fifth Extension Notes”).
As
of August 31, 2018, the outstanding loans to related parties amounted to $994,681and the outstanding loans to Phunware amounted
to $424,549.
As
of August 31, 2018, the Company had $70,000 of outstanding invoices to Nautilus Energy Management Corp.
Critical
Accounting Policies
Off-balance
sheet financing arrangements
We
have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in
transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest
entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
We
have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt
or commitments of other entities, or entered into any non-financial assets.
Contractual
obligations
At
August 31, 2018, we did not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities.
The Company has agreed to pay $10,000 a month for office space, administrative services and secretarial support to Nautilus Energy
Management Corp., an affiliate of our co-Chief Executive Officers. Services commenced on the date the securities were first listed
on Nasdaq on August 19, 2016 and will terminate upon the earlier of the consummation by the Company of an initial Business Combination
or the liquidation of the Company.
Critical
Accounting Policies
The
preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and income and expenses during the periods reported. Actual results could materially
differ from those estimates. The Company has identified the following as its critical accounting policies:
Emerging
Growth Company
Section
102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting
standards until private companies (that is, those that have not had a Securities Act registration statement declared effective
or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial
accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with
the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has
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, the Company, as an emerging growth company, can adopt the new or revised standard
at the time private companies adopt the new or revised standard.
Income
(Loss) Per Common Share
Net
income (loss)
per common share is computed by dividing net loss applicable to common stockholders by the weighted average
number of shares of common stock outstanding during the period, plus to the extent dilutive the incremental number of shares of
common stock to settle warrants, as calculated using the treasury stock method. At August 31, 2018, the Company had outstanding
warrants to purchase 14,871,098 shares of common stock. For all periods presented, these shares were excluded from the calculation
of diluted loss per share of common stock because their inclusion would have been anti-dilutive. As a result, diluted loss per
common share is the same as basic loss per common share for the period.
Financial
Instruments
The
fair value of the Company’s assets and liabilities, which qualify as financial instruments under FASB ASC 820, “Fair
Value Measurements and Disclosures,” approximates the carrying amounts represented in the accompanying consolidated balance
sheets.
Income
Taxes
There
is, at present, no direct taxation in the Republic of the Marshall Islands and interest, dividends, and gains payable to the Company
are received free of all Marshall Islands taxes. The Company is registered as an “exempted company” pursuant to the
Marshall Islands Business Corporations Act (as amended). As the Company proceeds with making investments in various jurisdictions,
tax considerations outside the Marshall Islands may arise. Although the Company intends to pursue tax-efficient investments, it
may be subject to income tax, withholding tax, capital gains tax, and other taxes imposed by tax authorities in other jurisdictions.
For U.S. tax purposes, the Company expects to be treated as a passive foreign investment company by its U.S. shareholders. The
Company does not expect to be subject to direct taxation based on net income in the U.S. as long as it maintains its non-U.S.
trade or business status. The Company does not expect to invest in any U.S. obligation that will be subject to U.S. withholding
taxes.
The
Company follows the provisions of ASC 740-10 which prescribes a recognition threshold and measurement attribute for how a company
should recognize, measure, present and disclose in its consolidated financial statements uncertain tax positions that the Company
has taken or expects to take on its tax return. ASC 740-10 requires that the consolidated financial statements reflect expected
future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant
facts, but without considering time values. As of August 31, 2018, the Company has not commenced operations and thus has no uncertain
tax positions.
Redeemable
common stock
All
of the 6,900,610 shares of common stock sold as part of the Units in the Public Offering contain a redemption feature which allows
for the redemption of such common stock under the Company’s liquidation or tender offer/stockholder approval provisions.
In accordance with ASC 480, redemption provisions not solely within the control of the Company require the security to be classified
outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity’s
equity instruments, are excluded from the provisions of ASC 480. Although the Company does not specify a maximum redemption threshold,
its amended and restated certificate of incorporation provides that in no event will the Company redeem its Public Shares in an
amount that would cause its net tangible assets (stockholders’ equity) to be less than $5,000,001.
The
Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of the security to equal
the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common stock
are affected by charges against additional paid-in capital.
At
August 31, 2018, 1,123,870 of the 3,961,287 Public Shares were classified outside of permanent equity at redemption value of $10.52
per share.
Recent
Accounting Pronouncements
Management
does not believe that there are any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would
have a material effect on the Company’s consolidated financial statements.
BUSINESS
References
in this section to “Phunware”, “we”, “our”, “us” or “the Company”
refer to Phunware, Inc.
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 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.
Our
Industry
We
participate in four rapidly evolving markets — mobile cloud software, media, big data and cryptonetworking — each
driven by some combination of technological advancements including cloud, software-defined infrastructure, mobility, data analytics,
IoT and decentralization.
Mobile
Cloud Software
— The mobile cloud software market includes SaaS-based mobile software for all businesses, brands
and consumers. The mobile application market is enormous, with worldwide smartphone users downloading more than 175 billion apps
— and spending over $86 billion on them — in 2017. (Source: App Annie, 2017 Retrospective). The number of apps available
to Android and iOS users climbed over 6 million in 2017 as well, and the average number of apps on a user’s phone is approximately
80. (Source: App Annie, 2017 Retrospective). In 2018, the app economy is predicted to enter a new era and surpass $110 billion
in app store spend (Source: App Annie, Top Predictions for the App Economy in 2018).
Media
Market
—
The digital media market includes display, native, video and other types of paid media campaigns rendered
on a connected device and used for audience building, audience engagement or audience monetization. According to eMarketer, digital
media spending including mobile will top $225 billion and represent 49.6% of total media investment by 2021 (Source: eMarketer,
“Worldwide Ad Spending eMarketer’s Updated Estimates and forecast for 2016-2021”). According to the Internet
Advertising Bureau (IAB), users spend 66% of their online time on a mobile device and mobile advertising revenue now makes up
54% of all digital ad revenues (Source: Internet Advertising Bureau (IAB), “Digital Trends: Consumer Usage of Digital and
its Influence on Ad Revenue”). In the first half of 2017, mobile advertising revenue was $21.7 billion in the US alone (Source:
Internet Advertising Bureau (IAB), “Digital Trends: Consumer Usage of Digital and its Influence on Ad Revenue”) and
Goodway Group predicts it will grow nearly 4% month-over-month with an expected overall price increase of over 45% by 2019. (Source:
Goodway Group, “2018 Programmatic Pricing Guide Projects Big Price Increase for mobile Ads by 2019”).
Big
Data Market
— The big data market includes businesses engaged in the creation, consumption and/or processing of
big data. IDC forecasts that this market will grow from $130 billion in 2016 to more than $203 billion in 2020 (Source: IDC, “Double-Digit
Growth Forecast for the Worldwide Big Data and Business Analytics Market Through 2020 Led by Banking and Manufacturing Investments,
According to IDC,” October 3, 2015). According to Cisco Systems, global mobile data traffic will grow from 7 exabytes per
month in 2016 to 49 exabytes per month in 2021, a compound annual growth rate of 47 percent (Source: Source: Cisco Global Cloud
Index: Forecast and Methodology, 2016-201 White Paper). Users are increasingly willing to share their data and participate in
this market: 40% of broadband households are willing to share data with manufacturers for product monitoring and maintenance (Source:
Parks and Associates, “More than three-fourths of U.S. broadband households use Wi-Fi for in-home connectivity,” May
31, 2017). Across 17 countries studied, 27% users are willing to share their personal data in exchange for benefits or rewards
like lower costs or personalized service (Source: GFK Insights, “More people firmly agree with sharing personal data, in
return for rewards, than firmly disagree,” January 27, 2017).
Cryptonetworking
— The cryptonetworking market includes currencies and other tokens that use distributed ledger technology and cryptography
to secure transactions and verify asset transfers. We believe that it grew exponentially over the course of 2017 and will continue
to grow, and that cryptocurrencies are larger than many national currencies and other major payment networks.
Real-time
cryptocurrency market capitalization information is available at the CoinMarketCap.com website.
PhunCoin
We
have formed a wholly-owned subsidiary, PhunCoin, Inc. that will be the issuer of our PhunCoin. PhunCoin will be designed for use
within 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. The PhunCoin Ecosystem is currently
in the development stage and is intended to enhance and augment our current mobile application platform, which enables businesses
to engage, manage and monetize the information collected by end users and our customers from our consumers.
We
currently anticipate that our products and technologies will be enhanced through the creation of the PhunCoin Ecosystem, and that
users in the new PhunCoin Ecosystem will fall into three basic categories:
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Manufacturers,
consumer product companies, marketing firms, brands and other sellers of goods and services. We generally refer to this group
as our “customers.”
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Individuals
that provide personally identifiable information to us and our customers. We generally refer to this group as “consumers.”
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Application
developers that will include the PhunCoin software development kits into their applications and other software developers
and engineers that will help create and maintain the PhunCoin Ecosystem. We generally refer to this group as “developers.”
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We
anticipate that, when the PhunCoin Ecosystem becomes operational, our customers will generally continue to pay us cash for use
of our technology and our consumers and developers generally will receive PhunCoin in exchange for providing services and information
to us and our customers.
In
accordance with the Merger Agreement, PhunCoin Sub has commenced an offering to raise capital to fund the development and creation
of the PhunCoin Ecosystem through the issuance of rights to receive future PhunCoin (the “Rights”). These Rights will
only be issued to accredited investors pursuant to an offering under Rule 506(c) of Regulation D under the Securities Act that
complies with know-your-customer (“KYC”), anti-money-laundering (“AML”) and accredited investor verification
requirements.
Our
current expectation is that the proceeds from the Rule 506(c) offering of Rights is anticipated to be used solely to fund development
of the PhunCoin Ecosystem, with any additional amounts being used at the discretion of the Phunware or PhunCoin Sub. We currently
estimate that the use of proceeds from the Rule 506(c) offering of Rights are anticipated to be used as follows:
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35%
— Sales & Marketing
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35%
— Research & Development
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20%
— Ecosystem Development
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10%
— General & Administrative
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PhunCoin
will be a digital asset built and transacted on top of an existing blockchain technology. We do not intend to create our own blockchain
technology. As a part of research and development, we expect to evaluate several blockchain technologies to determine which of
these providers meet the design specifications we require to create the PhunCoin Ecosystem. We are currently evaluating the feasibility
of potential solutions such as Ethereum, Stellar, Cardano and EOS. For each blockchain technology, we expect to conduct technical
evaluations, performance evaluations, user testing, and other analyses in order to determine the best technology for the PhunCoin
Ecosystem. In addition, we will only launch on a blockchain technology that will enable us to comply with the registration and
other requirements of the federal and state securities laws and other applicable laws and regulations.
When
the PhunCoin Ecosystem is operational (i.e., the “Token Generation Event”), which we expect will be approximately
one year after the Rule 506(c) offering for Rights has closed, PhunCoin Sub intends to issue PhunCoin pursuant to an offering
either registered or eligible for exemption from registration under the Securities Act. However, there is no assurance that the
offering of PhunCoin will be registered or eligible for an exemption from registration under the Securities Act. PhunCoin will
initially be issued to holders of the Rights and also to holders of Phunware’s Series F Preferred Stock who were also issued
warrants that entitle them to receive PhunCoin if the Token Generation Event occurs. These PhunCoin will have the same terms,
other than price, as the PhunCoin being issued to holders of the Rights.
For
securities law purposes, PhunCoin is deemed to have already been sold to the holders of the Rights and the warrants with respect
to the Series F Preferred Stock, or the Series F Warrants. This means that, if and when issued, such PhunCoin will be restricted
as to transfer and that any resale by such holders must be made pursuant to an exemption from registration or pursuant to an effective
resale registration statement. Phunware does not believe that the PhunCoin issued to holders of the Rights and Series F Warrants
will have any material impact on the amount of capital PhunCoin Sub (or Phunware) may be able to raise for the purposes of creating
and operating the PhunCoin Ecosystem or other future capital needs. This is because PhunCoin Sub (i) does not currently contemplate
using the proposed PhunCoin offering, as described below, to raise capital (although it could determine to do that as well) but
rather, to allow PhunCoin to be distributed in exchange for data and services and (ii) Phunware and the PhunCoin Sub expect to
be able to access other sources of capital, which may include debt financings and equity financings through additional private
placements, or other offerings (including the current Rule 506(c) private placement which is offering up to $100 million of Rights).
Phunware
intends for PhunCoin Sub to be the actual issuer of PhunCoin. Before PhunCoin Sub issues PhunCoin to the holders of the Series
F Warrants, or the Series F Warrantholders, Phunware will obtain the consent of those Series F Warrantholders representing the
requisite vote necessary to amend the Series F Warrants to provide for the assignment by Phunware to PhunCoin Sub of all of Phunware’s
obligations to issue PhunCoin. Pursuant to the amendment, PhunCoin Sub will fully and unconditionally assume all of Phunware’s
obligations to issue PhunCoin that exist under the Series F Warrants. Phunware will notify all Series F Warrantholders of any
amendment to the Series F Warrants and the assignment by Phunware, and the assumption by PhunCoin, of the obligations to issue
PhunCoin and intends to file a Current Report on Form 8-K once the amendment is entered into and becomes effective.
Once
our proposed PhunCoin offering is either registered with the SEC or eligible for an exemption from registration under the Securities
Act, we expect to distribute PhunCoin to developers in exchange for services, i.e. for the inclusion of the PhunCoin software
development kit (i.e. SDK) into the developers’ applications and for the application usage data they provide to the PhunCoin
Ecosystem. We also intend to distribute PhunCoin to consumers in exchange for their agreements to provide certain benefits to
us, including, but not be limited to, enriching their data with additional information and participating in marketing campaigns
that will assist us to deliver increased value to customers.
At
this time, we have not taken any action to list PhunCoin on a trading platform. We intend to list and allow trading of PhunCoin
in the future, but only on those platforms that comply with all applicable federal and state securities laws. Currently, no such
trading platforms exist.
PhunCoin
is intended to be a digital asset that entitles the holder to access the PhunCoin Ecosystem that we are building and to use PhunCoin
in exchange for goods and services in the PhunCoin Ecosystem. Both PhunCoin and the PhunCoin Ecosystem are currently under development
and, therefore, the specific legal and economic rights have not been finalized. However, we do not expect that PhunCoin will have
any governance, voting, dividend or other rights with respect to either PhunCoin Sub or us, and that we expect that all holders
of PhunCoin will have the same rights.
Our
core business is as a mobile application platform enabling our customers to utilize the platform to engage, manage and monetize
their interaction with consumers. Today, this takes the form of software modules such as location-based services, analytics, content
management, marketing automation, and other customer engagement technology designed to create desired business outcomes for that
customer. We expect to integrate PhunCoin into our core business platform as well as create new software and systems to support
the PhunCoin Ecosystem. PhunCoin will complement and supplement our core business by adding new capabilities for our customers
to use “cryptonetworking” to engage consumers, while at the same time creating a new ecosystem that allows those consumers
to benefit from the provision and use of their data. Our core business enables the rapid integration of mobile solutions, but
PhunCoin further enhances that capability by incentivizing customer and consumer engagement with these solutions.
Cryptonetworking
is currently not available to Phunware customers. To make cryptonetworking available, Phunware intends to deploy a combination
of standalone technology as well as integration into its MaaS platform such that customers could potentially use cryptonetworking
as a reward for consumers taking action in an application built on the MaaS platform. Phunware is not currently generating, nor
in the past has it generated, revenue from this product or solution offering. To the extent that this type of functionality may
require the PhunCoin Ecosystem to become a registered broker-dealer and register as an alternative trading system with the SEC,
PhunCoin Sub intends to undertake those registrations or revise the functionality in order to remain fully compliant with all
applicable laws.
Each
PhunCoin user account will be created using a technology called self-sovereign identity. This is an identity that is based on
blockchain technology and gives the user full control over this identity without a central authority. Since our approach to this
identity starts with an application and the user’s mobile device, the User who creates this identity will then be paired
to the device through a relationship on that identity system. In addition, this identity will be paired with an account on the
blockchain provider, which will then be the blockchain account at which the PhunCoin can be received via transactions. Key recovery
functions and custody of private digital asset keys will be handled by the identity solution provider and integrated into the
software system.
We
do not intend to create our own self-sovereign identity system, but to evaluate other existing systems already proven in the market
and to integrate them into the PhunCoin Ecosystem. Such providers include, but are not limited to, Sovrin/Everynm (i.e. www.sovrin.org),
Veres.One (i.e. www.veres.one) and uPort (i.e. www.uport.me). As a part of research and development, we will evaluate an array
of self-sovereign technology providers to determine which of these providers meet the design specifications we require to create
the PhunCoin Ecosystem. For each provider, we will conduct technical evaluations, performance evaluations, user testing, etc.
to determine the best technology for the PhunCoin Ecosystem. This will include evaluation and implementation of the technical
architecture needed to validate ownership and approve transfer of PhunCoin in order to comply with applicable securities laws.
Where
possible, we intend to use existing mobile security features, such as, but not limited to, Apple Touch ID to further secure and
at the same time enable easy access to the PhunCoin application using biometric/fingerprint capabilities of those devices.
Our
Solution
Our
business model includes a combination of subscription, transaction and service offerings that enable customers to engage, manage
and monetize their mobile application portfolios throughout the mobile application lifecycle, which occurs in four phases:
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Strategize
— We help brands define the application experience and determine the operating systems, feature sets and use
cases they want their mobile application to support.
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Create
— We help brands build, buy or lease their application portfolio.
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Launch
— We help brands launch their applications and build their mobile audience.
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Engage,
Monetize and Optimize
— We help brands activate, monetize and optimize their mobile application portfolios.
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Our
Offerings
Within
the four core markets above, our MaaS platform, products and solutions include the following:
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Software,
including recurring one- to five-year software licensing for
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MaaS
software ingredients that are included inside mobile application portfolios such as Software Development Kits (“SDKs”),
Application Programming Interfaces (“APIs”), scripts, portals, integrations, interfaces and other software tools,
solutions and services that address
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Business
Intelligence & Analytics (SDK that provides data related to application use and engagement),
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Content
Management (SDK that allows application admins to create and manage app content in a cloud-based portal),
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Alerts,
Notifications & Messaging (SDK that enables brands to send messages to app users through the app),
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Marketing
Automation (SDK that enables location-triggered messages and workflow);
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Advertising
(SDK that enables in-app audience monetization);
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Location-Based
Services (module that include Mapping, Navigation, Way finding, Workflow, Asset Management and Policy Enforcement), and
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Support
& Maintenance of the application;
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MaaS
software application frameworks that pre-integrate all of our MaaS software ingredients for use within mobile application
portfolios, solutions and services; and
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MaaS
vertical solutions, which are off-the-shelf, iOS- and Android-based mobile application portfolios, solutions and services
that address
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the
patient experience for healthcare,
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the
shopper experience for retail,
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the
fan experience for sports,
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the
traveler experience for aviation,
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the
luxury resident experience for real estate,
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the
luxury guest experience for hospitality,
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the
student experience for education and
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the
generic user experience for all other verticals and applications.
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Application
transactions, including re-occurring and one-time transactional media purchases, often via insertion orders, for
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application
discovery, user acquisition and audience building,
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audience
engagement, and
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Data,
including re-occurring and one-time application transaction media campaigns and recurring one to five year data licensing
for one-to-one, indoor and outdoor, consumer targeting across
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Global
Position Systems (GPS),
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high-
and low-density WiFi,
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physical
and virtual beacons; and
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Cryptonetworking,
including a PhunCoin™ crypto ecosystem that directly connects and rewards mobile application users and user segments
worldwide with the businesses that want to reach them locally, regionally or globally at scale. Cryptonetworking and PhunCoin
is not currently available to our customers, as the Phunware is evaluating blockchain technologies for its PhunCoin Ecosystem.
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Our
Competitive Strengths
Fully
integrated and comprehensive solutions:
Our comprehensive solutions can be used across mobile application experience definition,
application portfolio creation, user discovery, user acquisition, user engagement and user monetization. Data from application
analytics and our database of over one petabyte can be used to inform business decisions related to mobile strategy, marketing,
operations and more.
Data
reach and scale:
Since Phunware’s 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 for every
device touching networks globally to then reach everyone, everywhere, indoors and outdoors, in real time, on a 1-to-1 basis.
Built
to be mobile-first, native-first, cloud-based:
Phunware was built from the ground up to focus on native mobile development,
while other companies in the mobile space have attempted to create shortcuts with “write once, run anywhere” software.
The result is almost a decade of platform-specific mobile expertise, a major competitive differentiator.
Results-driven
culture
:
Our employees are granted stock options upon hire and are encouraged to think of Phunware as a company
they own rather than a company for which they work. We also promote from within to reward top performers and encourage leadership
development. The result is an employee base singularly focused on solving problems and driving results.
Intellectual
property portfolio development and world-class engineering resources
:
Through our world-class in-house technical
and engineering organization, we have focused developing our intellectual property, including methods of accessing wireless account
information, rendering content on a wireless device, indoor navigation with a mobile device and more. We are developing creative
solutions to solve complex technical problems and create competitive advantages for our customers.
Consumer-first
mindset:
As news stories about improper use and abuse of consumer data by social networks and app developers continue
to surface, we are in a unique position to capitalize on other technology companies’ lack of foresight. The PhunCoin crypto
token will empower users to control and be compensated for the data they contribute to the PhunCoin Ecosystem, and it will prevent
traditional security breach concerns by storing and biometrically protecting data and self-sovereign identity client-side (versus
in the cloud).
Our
Growth Strategy
Key
elements of our growth strategy include:
Expand
mobile products and services.
Mobile applications, media and data are among the fastest-growing and complex technology
markets. We have made significant investments in research and development and plan to continue extending the functionality and
breadth of our applications in the future.
Deepen
existing customer relationships.
We believe that we are well positioned to identify new opportunities or enhance existing
services and solutions within our existing customers. We create cross and upsell opportunity between subscription, media and data
customers as each customer seeks to deepen its approach to mobile application lifecycle management.
Develop
new relationships to expand our customer base.
We intend to continue to grow our customer base by expanding our team of
sales professionals and developing our indirect channel relationships. We are able to leverage our mobile expertise and capabilities
to compete effectively for new customers both directly and indirectly. Primary indirect channels include hardware, software, carriers
and systems integrators/consultancies.
Continue
to grow our strong domestic footprint and expand internationally.
We have a strong and growing presence in the United
States and we believe there are significant opportunities for further domestic expansion. We believe there are multiple attractive
market opportunities, both domestically and internationally, into which we will continue to opportunistically expand. Top expansion
targets include entertainment, healthcare, retail and real estate — all verticals that benefit from our integrated solutions,
comprehensive lifecycle approach and ability to engage users in both digital and physical worlds.
Add
new capabilities and geographic regions through strategic acquisition.
We operate in a fragmented market that offers significant
consolidation opportunities. We will continue to evaluate strategic acquisitions and partnerships that enhance our capabilities
and expand our geographic footprint, both domestically and internationally.
Expand
our partnership network with third-party providers of tools and services.
We are able to leverage our mobile expertise
and capabilities to compete effectively for new customers both directly and indirectly. Primary indirect channels include hardware,
software, carriers and systems integrators/consultancies. We are focused on building our brand to grow within existing and target
end markets where there is strong demand for the products and solutions we provide.
Our
Customers
Our
target customers are enterprise companies with consistent IT spending that are looking to enact digital transformation in their
business — whether it is retail, healthcare, entertainment, real estate or any other industry. We provide technology and
solutions to support these companies through every stage of the mobile application lifecycle.
We
count many of the world’s most recognizable brands as our customers. Examples include: FOX Network Group, The CW, MD Anderson,
Dignity Health, Verizon, WWE, AT&T Stadium, King, Zynga and many more.
We
believe the multi-year contractual nature of our software and managed services provides revenue visibility. Our subscription agreements
with our customers consist of standard services agreements that generally do not contain any minimum commitment terms that would
guarantee business for us and do not impose obligations upon us such as exclusivity or other terms. These agreements provide standard
terms relating to payment, liability, performance, cancellation and termination, confidentiality, and indemnification obligations,
among other provisions. All of these agreements contain terms of service that generally are consistent across Phunware’s
customers. These standard services agreements are, for the most part, governed by the standard terms and conditions from the Interactive
Advertising Bureau’s (“
IAB
”) Standard Terms and Conditions for Internet Advertising for Media Buys One
Year or Less, which provides that in the event that payments are not paid to the agency, then the media company, or us, agrees
to hold the advertiser solely liable.
Concentration
of Major Customers
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% of our net sales, respectively. During the year ended December 31, 2016,
Fetch accounted for 49% of our net sales. As with our other subscriptions and services customers, our contractual arrangements
with Fox are governed by standard terms of service and statements of work. Furthermore, our contractual arrangements with our
application transaction customers, including Fetch, are governed by insertion orders, which in addition to being governed by our
standard terms and conditions are also governed by IAB terms, including but not limited to payment liability and obligations.
The revenue concentration of these customers is simply a function of the Company selling additional services and expanding the
scope of work. Terms are consistent with our standard terms and contain no materially different terms or conditions.
Our
agreements, including those with Fox and Fetch, are pursuant to standard services agreements. All of these agreements contain
standard terms of service that generally are consistent across Phunware’s customers.
Our
application transaction agreements, also known as insertion orders, are typically governed by the IAB Standard Terms and Conditions
for Internet Adverting for Media Buys One Year or Less (V3.0) (the “IAB Terms”), which can be found on the IAB’s
website. The IAB Terms in Section III.c provide that in the event that payments are not paid to the agency, then the media company,
or us, agrees to hold the advertiser solely liable . Phunware views the agreements as contracts that ordinarily accompany the
business conducted by Phunware and, because of the lack of any commitments to provide a certain amount of business, Phunware is
not substantially dependent on the agreements.
Technology
Infrastructure and Operations
Our
hybrid SaaS solutions enable us to develop and deliver products to customers at large scale with best-fit cost efficiencies. Our
customers are served from geographically disperse datacenter and cloud hosting providers primarily located on the United States
West and East coasts, Ireland, and Tokyo, along with content delivery network (“
CDN
”) providers located throughout
the world.
Each
hosting facility has multiple compliance accreditations including ISO 27001, 27017, 27018, SOC 1-3, SSAE-16, HIPAA and PCI-DSS.
All facilities have 24x7 on-site security staff, biometric access control, security cameras and pre-approved and escorted access
controls. Our facilities feature redundant power, battery backup, air conditioning systems and diesel generators to ensure our
uptime and availability.
Our
solutions are built using service and micro-service oriented architecture principles, utilizing open source and commercially available
software. All of our products are built with scale, fault tolerance and redundancy as foundational pillars. Our operations teams
are on-call and staffed 24x7x365 ensuring we can meet the high levels of uptime and performance demanded by our customers, and
to meet or exceed our 99.9% SLA availability commitment outside of planned maintenance windows.
We
believe application security is paramount to the foundational design for all the software we write. Our software architects treat
code security as a core requirement and our development teams follow security standards at each stage of our Secure Development
Lifecycle (“SDLC”). Our products contain numerous features designed to keep our platform and products secure, including
encrypted data transportation (“HTTPs”), multi-factor authentication, API/SDK authentication and authorization, role-based
access controls, and encrypted data at rest. We implement manual code reviews, static application security testing (“SAST”),
open source analysis (“OSA”), in-house QA/QC engineering and third party security assessments to ensure our technology
infrastructure is secure.
Competition
The
market for technology and solutions related to mobile application lifecycle management is evolving, highly competitive and significantly
fragmented. With the introduction of new technologies and the potential entry of new competitors into the market, we expect competition
to increase and intensify in the future, which could harm our ability to increase sales, maintain or increase renewals and maintain
our prices.
We
compete primarily with companies offering cloud-based software solutions for location-based services, mobile marketing automation,
content management, analytics and audience monetization, as well as data and campaign management for audience building and engagement.
We also sometimes compete with application development agencies, in-house mobile teams and products developed by software providers
that allow customers to build and scale new mobile applications. Our competitors include Adobe, Oracle, Urban Airship, Chaotic
Moon, Adroll and many more.
We
believe the principal competitive factors in our market include the following:
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product
features and functionality;
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location
accuracy and latency;
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technology
architecture;
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level
of customer satisfaction;
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ease
of use;
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deployment
options and hardware flexibility;
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breadth
and depth of application functionality;
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professional
services and customer support;
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total
costs of ownership;
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brand
awareness and reputation;
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sophistication
of technology platform;
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actionable
insights through big data analytics;
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capability
for customization, configurability, integration, security, scalability and reliability of applications;
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ability
to innovate and respond to customer needs rapidly;
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size
of customer base and level of user adoption; and
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ability
to integrate with legacy enterprise infrastructures and third-party applications.
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Some
of our current competitors have, and future competitors may have, greater financial, technical, marketing and other resources,
greater resources to devote to the development, promotion, sale and support of their products and services, more extensive customer
bases and broader customer relationships, and/or longer operating histories and greater name recognition. As a result, these competitors
may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. In a few cases,
some competitors may also be able to offer competing solutions at little or no additional cost by bundling them with their existing
suite of solutions.
Government
Regulation
We
are subject to numerous U.S. and foreign laws and regulations that are applicable to companies engaged in the business of advertising
on mobile devices. In addition, many areas of law that apply to our business are still evolving and could potentially affect our
business to the extent they restrict our business practices or impose a greater risk of liability.
Given
the nascent stage of mobile advertising, industry practices are rapidly evolving. We participate in the Digital Advertising Alliance
and other industry groups that are developing best practices for the mobile advertising industry.
Privacy
and Data Protection
Privacy
and data protection laws play a significant role in our business. In the United States, at both the state and federal level, there
are laws that govern activities such as the collection and use of data by companies like us and privacy and data protection issues
generally have gained wide media and public attention recently. Online advertising activities in the United States have primarily
been subject to regulation by the FTC, which has regularly relied upon Section 5 of the Federal Trade Commission Act to enforce
against unfair and deceptive trade practices. Section 5 has been the primary regulatory tool used to enforce against alleged violations
of online privacy policies and would apply to privacy practices in the mobile advertising industry. In December 2012, the FTC
adopted amendments to rules under COPPA, which went into effect in July 2013. These amendments broadened the potential applicability
of COPPA compliance obligations to our activities and those of our clients. Further, Europe’s new General Data Protection
Regulation (which came into force in May 2018) extends the jurisdictional scope of European data protection law. As a result,
we will be subject to the GDPR when we provide our media and data services in Europe. The GDPR imposes stricter data protection
requirements that may necessitate changes to our services and business practices.
The
issue of privacy in the mobile advertising industry is still evolving. Federal legislation and rulemaking has been proposed from
time to time that would govern certain advertising practices as they relate to mobile devices, including the use of precise geolocation
data. Although such legislation has not been enacted, it remains a possibility that such federal and state laws may be passed
in the future.
There
have been numerous civil lawsuits, including class action lawsuits, filed against companies that conduct business in the mobile
device industry, including makers of mobile devices, mobile application providers, mobile operating system providers and mobile
third-party networks. Plaintiffs in these lawsuits have alleged a range of violations of federal, state and common laws, including
computer trespass and violation of privacy laws.
In
addition, mobile services are generally not restricted by geographic boundaries and our services reach mobile devices throughout
the world. We transact business with our customers in Europe and Southeast Asia and, as a result, some of our activities may also
be subject to the laws of foreign jurisdictions. In particular, European data protection laws can be more restrictive regarding
the collection and use of data than those in U.S. jurisdictions. As we continue to expand into other foreign countries and jurisdictions,
we may be subject to additional laws and regulations that may affect how we conduct business.
Research
and Development
Our
ability to compete depends in large part on our continuous commitment to research and development and our ability to rapidly introduce
new applications, technologies, features and functionality into our solutions. Our research and development efforts are focused
on improving and enhancing our existing service offerings by working closely with our customers, conducting quality assurance
testing and improving our core technology as well as developing new proprietary services and solutions. Performance, security,
functional depth and breadth, and usability of our solutions drive our technology decisions and product development.
Intellectual
Property
Our
ability to protect our intellectual property, including our technologies, is an important factor in the success and continued
growth of our business. We protect our intellectual property through trade secrets law, patents, copyrights, trademarks and contracts.
We have established business procedures designed to maintain the confidentiality of our proprietary information such as the use
of our license agreements with customers and our use of our confidentiality agreements and intellectual property assignment agreements
with our employees, consultants, business partners and advisors where appropriate. Some of our technologies rely upon third party
licensed intellectual property.
In
the United States, we have 13 patents issued, 6 non-provisional patent applications pending and one provisional patent application
pending. The issued patents expire between the years 2027 and 2036. In addition, we have registered “Phunware” as
a trademark in the United States and Canada. We cannot assure you that any of our patent applications will result in the issuance
of a patent or whether the examination process will require us to narrow our claims. Furthermore, even if a patent is issued,
we cannot assure you that such patent will be adequate to protect our business. We also license software from third parties for
integration into our solutions, including open source software and other software available on commercially reasonable terms.
Despite
our efforts to protect our technology and proprietary rights through intellectual property rights, licenses and confidentiality
agreements, unauthorized parties may still copy or otherwise obtain and use our software and other technology. In addition, we
intend to expand our international operations, and effective patent, copyright, trademark, and trade secret protection may not
be available or may be limited in foreign countries.
Our
industry is characterized by the existence of a large number of patents and claims and related litigation regarding patent and
other intellectual property rights. In particular, leading companies in our markets have extensive patent portfolios and are regularly
involved in litigation. From time to time, third parties, including certain of these leading companies, may assert patent, copyright,
trade secret, and other intellectual property rights against us, our channel partners or our customers. Our standard license and
other agreements may obligate us to indemnify our channel partners and customers against such claims. Successful claims of infringement
by a third party could prevent us from continuing to offer our solution or performing certain services, require us to expend time
and money to develop non-infringing solutions, or force us to pay substantial damages, including treble damages if we are found
to have willfully infringed patents or copyrights, royalties or other fees. Competitors may also be more likely to claim that
our solutions infringe their proprietary rights and seek an injunction against us from continuing to offer our platform. We cannot
assure you that we do not currently infringe, or that we will not in the future infringe, upon any third-party patents or other
proprietary rights.
Employees
We
leverage our employees’ long-standing, deep customer relationships and strong technical expertise to deliver complex solutions
that meet customer needs and advance mobile technology. As of September 30, 2018, we had 160 employees, including 110 software
developers, engineers, QA engineers and product managers. We employed a sales and marketing force of approximately 27 professionals.
We
believe it is as the result of its employee base that we have long-standing customer engagements and strong financial performance.
None of our employees are currently covered under any collective bargaining agreements. We believe our relations with our employees
are good.
Facilities
Our
corporate headquarters is located in Austin, Texas, where we currently lease approximately 10,600 square feet under the lease
agreement set to expire in 2020. We also lease facilities in Newport Beach, California; San Diego, California; and Miami, Florida.
We believe our current facilities are adequate to meet our ongoing needs and that, to accommodate growth, we will seek additional
facilities as needed to satisfy our growth.
Legal
Proceedings
From
time to time we may be involved in litigation relating to claims arising out of our operations in the normal course of business,
including commercial disputes from time to time.
On
September 26, 2017, we filed a breach of contract complaint against Uber Technologies, Inc. seeking approximately $3 million (plus
interest) for unpaid invoices for advertising campaign services provided for Uber in the first quarter of 2017. The case, captioned
Phunware, Inc. v. Uber Technologies, Inc.
, Case No. CGC-17-561546 was filed in the Superior Court of the State of California
County of San Francisco. On November 13, 2017, Uber generally denied the allegations in our complaint and also filed a cross-complaint
against us and Fetch — the advertising agency Uber retained to run its mobile advertising campaign for the period 2014 through
the first quarter of 2017 (the “Fetch Campaign”), asserting numerous fraud and contract-based claims. All the claims
stem from Uber’s assertion that Fetch and/or We (and/or other-as-yet-unidentified ad networks and publishers) are liable
for the fraud-infested Fetch Campaign, under which Uber overpaid Fetch and mobile advertising providers due to fraudulent attribution
for installments of the Uber application. Uber does not allege any specific dollar amount that it is seeking in damages against
either of the named cross-defendants (Fetch and Phunware). We filed a motion to dismiss the cross-complaint, which was heard on
February 7, 2018. The motion was granted in part and denied in part by the Court. On April 16, 2018, the action was designated
complex, and the matter has been assigned for all purposes to Judge Wiss of the Superior Court of California, San Francisco County
(Department 305). The Court has set a trial date of April 29, 2019. The parties have exchanged documents in discovery and depositions
are underway, and this is a process that will take months to complete and may involve motion practice. We maintain that our claims
against Uber are meritorious and that Uber’s claims against us are not. However, we make no predictions on the likelihood
of success of prevailing on our contract action against Uber or on the likelihood of defeating Uber’s claims against us.
On
September 8, 2017, we and Greater Houston Convention and Visitors Bureau (“GHCVB”) initiated litigation in a breach
of contract dispute. The case is captioned Greater Houston Convention and Visitors Bureau v. Phunware, Inc., Cause No. 2017-58894,
in the District Court of Harris County, Texas. The dispute concerns an October 2016 agreement for us to develop a mobile application
and advertising campaign for GHCVB. In April 2018, the parties mediated this dispute with the assistance of a private mediator.
The mediation was successful and Phunware was awarded $485,000, which was paid to us in April 2018. Each side was responsible
for their own attorneys’ fees.
MANAGEMENT
EXECUTIVE
OFFICERS AND DIRECTORS
The
following table sets forth the names, ages and positions of our executive officers and directors as of December 26, 2018:
Name
|
|
Age
|
|
|
Position
|
Executive Officers
|
|
|
|
|
|
|
Alan S. Knitowski
|
|
|
49
|
|
|
Chief Executive Officer and Director
|
Luan Dang
|
|
|
47
|
|
|
Chief Technical Officer
|
Matt Aune
|
|
|
43
|
|
|
Chief Financial Officer
|
Randall Crowder
|
|
|
38
|
|
|
Chief Operating Officer and Director
|
Significant Employees
|
|
|
|
|
|
|
Barbary Brunner
|
|
|
54
|
|
|
Chief Marketing Officer
|
Matthew Lindenberger
|
|
|
40
|
|
|
Executive Vice President of Engineering
|
Tushar Patel
|
|
|
52
|
|
|
Executive Vice President of Corporate Development
|
Non-Employee Directors
|
|
|
|
|
|
|
Prokopios (Akis) Tsirigakis
(1)(2)
|
|
|
63
|
|
|
Chair
|
George Syllantavos
(2)
|
|
|
54
|
|
|
Director
|
Lori Tauber Marcus
(2)(3)
|
|
|
56
|
|
|
Director
|
Keith Cowan
(1)(3)
|
|
|
62
|
|
|
Director
|
Kathy Tan Mayor
(1)(3)
|
|
|
42
|
|
|
Director
|
|
(1)
|
Member
of the Audit Committee
|
|
(2)
|
Member
of the Compensation Committee
|
|
(3)
|
Member
of the Nominating and Corporate Governance Committee
|
EXECUTIVE
OFFICERS
Alan
Knitowski
co-founded Phunware and has served as its Chief Executive Officer and a member of the board of directors since
inception. Prior to co-founding Phunware, Mr. Knitowski served as President of Strategic Investments and Managing Director for
Trymetris Capital Management, LLC, or Trymetris, a hedge fund sponsor, from April 2004 to February 2009. Mr. Knitowski holds a
B.S. in Industrial Engineering from The University of Miami, an M.S. in Industrial Engineering from the Georgia Institute of Technology
and an M.B.A from the Haas School of Business at the University of California, Berkeley.
We
believe Mr. Knitowski is qualified to serve as a member of our board of directors because as co-founder he has extensive knowledge
of our company and his comprehensive background in information technology.
Luan
Dang
co-founded our Phunware and has served as its Chief Technology Officer since February 2009. Prior to co-founding
Phunware, he served as President of Alternative Investments for Trymetris from April 2004 to February 2009. Mr. Dang holds a B.S.
in Computer Engineering from the University of California at San Diego and an M.S. in Computer Science from Stanford University.
Matt
Aune
has served as Phunware’s Chief Financial Officer since August 2013. Mr. Aune previously served as its Director
of Finance and Accounting from August 2011 to August 2013. Prior to joining Phunware, Mr. Aune was employed by Sony Computer Entertainment
America as Senior Business Finance and Operations Analyst from July 2010 to August 2011. From 2003 to 2009, Mr. Aune served in
a variety of roles at Midway Games, a video game developer and publisher, with his final role as the Senior Manager of Financial
Planning and Analysis for Worldwide Product Development. Mr. Aune holds a B.A. in Economics from the University of California,
San Diego and an M.B.A. from San Diego State University.
Randall
Crowder
has served as Phunware’s Chief Operating Officer since February 2018. In September 2017, he founded and
continues to serve as the Managing Partner at Nove Ventures, a venture capital firm, which focuses on investing in established
companies like Phunware that are looking to leverage blockchain technology to complement their core business model. Since August
2009, Mr. Crowder has also been a co-founder and Managing Partner at TEXO Ventures, which focuses primarily on tech-enabled health
services. Mr. Crowder holds a B.S. in General Management from the United States Military Academy at West Point and an M.B.A. from
the McCombs School of Business at the University of Texas at Austin.
We
believe Mr. Crowder is qualified to serve as a member of our board of directors because of his extensive knowledge and background
in cryptosecurities and cryptocurrencies, as well as his experience in information technology.
SIGNIFICANT
EMPLOYEES
Barbary
Brunner
has served as its Chief Marketing Officer since May 2018. Prior to joining Phunware, she served as Chief Executive
Officer of the Austin Technology Council from March 2016 to May 2018. From 2011 to 2016, Ms. Brunner was a principal for Promoveo,
which focuses on business growth and organizational optimization. From 2009 to 2010, Ms. Brunner was Chief Marketing Officer and
Senior Vice President of PriceGrabber.com, and from 2007 to 2009 she served as Chief Marketing Officer of the Media Division of
Yahoo. Ms. Brunner attended Reed University.
Matthew
Lindenberger
has been our Executive Vice President of Engineering since April 2018. Prior to that, he was our Vice President
of Engineering since the Simplikate acquisition in June 2014. While at Simplikate, Mr. Lindenberger was their President and Chief
Technology Officer from June 2003 to June 2014.
Tushar
Patel
has been our Executive Vice President of Corporate Development since the acquisition of Simplikate in June 2014.
Prior to that, Mr. Patel was founder and CEO of Simplikate since Feb 2002. Mr. Patel holds a B.B.A in Management from the University
of Texas at Austin.
NON-EMPLOYEE
DIRECTORS
Prokopios
(Akis) Tsirigakis
served as Stellar’s Chairman of the Board of Directors, President and co-Chief Executive Officer
since December 2015. From May 2011 until October 2013, Mr. Tsirigakis co-founded and served as Chairman and Co-CEO of Nautilus
Marine, a special purpose acquisition company that completed an initial public offering on July 16, 2011 and was listed on Nasdaq.
Mr. Tsirigakis has served as the CEO of Nautilus Offshore Services Inc., an offshore service vessel owner and the successor of
Nautilus Marine, since October 2013 and as a Vice President of Dryships, Inc. (Nasdaq: DRYS), which acquired Nautilus Offshore
Services Inc., since December 2015. From May 2005 to November 2007, he co-founded and served as Chairman of the Board, Chief Executive
Officer and President of, Star Maritime (AMEX:SEA), a blank check company. From November 2007 until February 2011, he was the
President and Chief Executive Officer of, Star Bulk Carriers Corp., a dry-bulk ship-owning company and the successor of Star Maritime.
From November 2003 until November 2007, he served as Managing Director of Oceanbulk Maritime S.A., a company that operated and
managed dry bulk vessels. From November 1998 to November 2007, Mr. Tsirigakis established and served as the Managing Director
of Combine Marine Inc., a company providing ship management services to third parties. From 1991 to 1998, Mr. Tsirigakis was the
Vice-President and Technical Director of Konkar Shipping Agencies S.A. of Athens, after having served as Konkar’s Technical
Director from 1984 to 1991. From 1981 to 1984, Mr. Tsirigakis was the Technical Manager of Konkar’s affiliate, Arkon Shipping
Agencies Inc. of New York. From 2011 to 2015, Mr. Tsirigakis served as a director of Ocean Rig UDW Inc. (Nasdaq: ORIG). Mr. Tsirigakis
received his Master’s Degree (1979) and B.Sc. in Naval Architecture from The University of Michigan, Ann Arbor, USA. We
believe Mr. Tsirigakis is well-qualified to serve as a member of the Board due to his public company experience, business leadership,
operational experience and experience in a prior blank check offering, such as Star Maritime and Nautilus Marine.
We
believe Mr. Tsirigakis is qualified to serve as a member of our board of directors because of his extensive leadership experience
in serving as an executive officer of several public companies and experience serving on the boards of directors and audit committees
of several public companies. We believe Mr. Tsirigakis’ experience on several audit committees over the years will help
us implement sound corporate governance policies and streamlined corporate processes that will optimize our internal processes
both in terms of efficiency and implementing checks and balances.
George
Syllantavos
served as Stellar’s co-Chief Executive Officer, Chief Financial Officer, Secretary and Director since
December 2015. Mr. Syllantavos co-founded in February 2013 and is Chief Executive Officer of, Nautilus Energy Management Corp.
(not affiliated with Nautilus Offshore Services Inc.), a maritime energy services company involved in maritime project business
development and ship management focusing on the offshore supply and gas sectors. From September 2009 to December 2016, he was
the President, Secretary, Treasurer and sole director of BTHC X, Inc. (OTCBB: BTXI) and has been serving on the company’s
board of directors since its merger with iOra Software Ltd. From May 2011 until February 2013, Mr. Syllantavos co-founded and
served as Co-CEO and CFO of Nautilus Marine, a special purpose acquisition company that completed an initial public offering on
July 16, 2011 and was listed on Nasdaq. He served as the CFO of Nautilus Offshore Services Inc., an offshore service vessel owner
and the successor of Nautilus Marine, from February 2013 until April 2014. From November 2007 to August 2011, he served as Chief
Financial Officer, Secretary and Director of Star Bulk Carriers Corp., a dry-bulk ship-owning company. From May 2005 to November
2007, he served as the Chief Financial Officer, Secretary and Director of Star Maritime (AMEX:SEA), its predecessor, which was
a blank check company. From May 1999 to December 2007, he was the President and General Manager of Vortex Ltd., an aviation consulting
firm specializing in strategic analysis, fleet planning and asset management. From January 1998 to April 1999, he served as a
financial advisor to Hellenic Telecommunications Organization S.A., where, on behalf of the Chief Executive Officer, he coordinated
and led the company’s listing on the New York Stock Exchange (NYSE:OTE) and where he had responsibilities for the strategic
planning and implementation of multiple acquisitions of fixed-line telecommunications companies. Mr. Syllantavos served as a financial
and strategic advisor to both the Greek Ministry of Industry & Energy (from June 1995 to May 1996) and the Greek Ministry
of Health (from May 1996 to January 1998), where, in 1997 and 1998, he helped structure the equivalent of a US$700 million bond
issuance for the payment of outstanding debts to the suppliers of the Greek National Health System. From 1998 to 2004, he served
as a member of the Investment Committee of a merchant banking firm, where he reviewed and analyzed many acquisition targets of
small or medium sized privately-held manufacturing firms in the U.S. and internationally, of which he assisted in negotiating,
structuring and implementing the acquisition of several such firms. Before that, he served for almost 5 years as an aviation consultant
specializing in strategic planning and fleet asset management. Mr. Syllantavos has a B.Sc. in Industrial Engineering from Roosevelt
University in Chicago and an MBA in Operations Management, International Finance and Transportation Management from the Kellogg
Graduate School of Management at Northwestern University (USA).
We
believe Mr. Syllantavos is well-qualified to serve as a member of the Board due to his public company experience, business leadership,
operational experience and experience in a prior blank check offering, such as Star Maritime and Nautilus Marine. We believe Mr.
Syllantavos is qualified to serve as a member of our board of directors because of his experience serving as a chief financial
officer of a public company and on the board of directors of a public company, as well as his experience developing and implementing
from inception several SarbOx systems. Mr. Syllantavos’ experience will contribute towards implementing sound corporate
governance policies and streamlined corporate processes that will also optimize the internal processes both in terms of efficiency
and implementing checks and balances.
Lori
Tauber Marcus
combines strategic vision, strong business and general management acumen with direct-to-consumer expertise
in e-commerce, digital marketing and social media to grow consumer-facing businesses worldwide. In 2018, Ms. Marcus joined the
board of Golub Corporation, a large privately-held regional grocer. Since 2017, Ms. Marcus has served on the advisory board of
Meural, Inc., a VC-backed, early stage digital art technology company. Since 2016, Ms. Marcus has served as on the board of DNA
Diagnostics Center, a private equity backed leader in private DNA testing services, and she is currently the Chair of the board
of directors. Since 2016, Ms. Marcus has served as a director for SHARE, a women’s cancer support organization. Since 2012,
she served as an advisor to the CEO and CMO of Carrington Farms. As Vice Chair of the board of directors of the Multiple Myeloma
Research Foundation (MMRF), she serves as an ex officio member of the Audit, Board Development, Programming, and HR Committees.
She has served on the MMRF board since 2004. Ms. Marcus founded Courtyard Connections, LLC in 2015 and since 2017 she has worked
with the Harvard Business School’s Kraft Precision Medicine Accelerator as Chair of the Direct-to-Patient Initiative. From
2015 to 2017, she was a member of the CMO Advisory Board for VentureBeat. In 2016, she served as Interim CMO for Peloton Interactive,
where she was the leader of brand strategy, integrated marketing, public relations, acquisition marketing, loyalty, retention/engagement
and email marketing, social media, creative services and advanced analytics. From 2013 to 2015, Ms. Marcus was the Executive Vice
President and Chief Global Brand and Product Officer at Keurig Green Mountain, Inc (NASDAQ: GMCR). From 2011 to 2012, she was
CMO at The Children’s Place (NASDAQ: PLCE). Ms. Marcus had a 24-year career with PepsiCo, from 1987 to 2011 that included
holding national and global Senior Vice President and general management roles (2004 – 2011). Ms. Marcus holds a BSE from
The Wharton School, University of Pennsylvania.
We
believe Ms. Marcus is qualified to serve as a member of our board of directors due to her experience in capital market activities,
as well as her current and former experience on the boards of directors of other companies.
Kathy
Tan Mayor
has held numerous leadership positions in business development, retail marketing, loyalty marketing, and digital
marketing technology. She is currently the Chief Marketing Officer of BoxyCharm, a beauty subscription service company located
in South Florida. From 2016 to 2018, Ms. Mayor was the Chief Digital Officer across the 10 portfolio brands of Carnival Corporation
and the Chief Marketing Officer of Carnival Cruise Line. From 2008 to 2016, Ms. Mayor held a number of positions at Las Vegas
Sands Corporation including a number of vice president and senior vice president roles in strategy and marketing. From 2005 to
2008, she held multiple director positions with Caesar Entertainment Corporation. Prior to that Ms. Mayor worked for McKinsey
& Company and Proctor & Gamble in Southeast Asia. Ms. Mayor has a B.S. in Management Engineering from Ateneo de Manila
University and an MBA from Harvard Business School.
We
believe Ms. Mayor is qualified to serve as a member of our board of directors due to her marketing and digital and information
technology experience.
Keith Cowan
is an experienced
executive officer, board member, advisor and investor. Since 2013, he has been CEO of Cowan Consulting Corporation that provides
strategic advisory services to various companies in multiple industries. From 2007 to 2013, Mr. Cowan was President of Strategic
Planning and Corporate Initiatives for Sprint Corporation. From 1996 to 2006, he served in multiple roles at BellSouth Corporation,
including Chief Development Officer, President of Marketing & Product Management, and Chief Network Field Officer. From 1982
to 1996, Mr. Cowan was partner at Alston & Bird LLP. He has served as a board member for Globalstar (NYSE: GSAT) since December
2018, Vice Chairman of Fox Theatre in Atlanta since 2006, Chairman of the Morehead-Cain Scholarship Fund since 2009, and a Trustee
of the Loomis Chaffee School since 2014. He also served as a board member of the YMCA of Metro Atlanta from 1999 to 2018. Mr. Cowan
holds a BA in Economics and Political Science from the University of North Carolina at Chapel Hill and a JD, Law from the University
of Virginia School of Law.
We
believe Mr. Cowan is qualified to serve as a member of our board of directors due to his legal and regulatory experience.
Corporate
Governance Guidelines and Code of Business Conduct
Our
board of directors has adopted Corporate Governance Guidelines that address items such as the qualifications and responsibilities
of our directors and director candidates and corporate governance policies and standards applicable to us in general. In addition,
our board of directors has adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors,
including our Chief Executive Officer, Chief Financial Officer, and other executive and senior financial officers. The full text
of our Corporate Governance Guidelines and Code of Business Conduct and Ethics is posted on the Corporate Governance portion of
the investor relations page of our website at www.phunware.com. We will post amendments to our Code of Business Conduct and Ethics
or waivers of our Code of Business Conduct and Ethics for directors and executive officers on the same website.
Board
Composition
Our
business affairs are managed under the direction of our board of directors. Our board of directors consists of seven members,
five of whom qualify as independent within the meaning of the independent director guidelines of Nasdaq. Messrs. Crowder and Knitowski
are not considered independent.
Our
board of directors is divided into three staggered classes of directors. At each annual meeting of stockholders, a class of directors
will be elected for a three-year term to succeed the same class whose term is then expiring, as follows:
|
●
|
the
Class I directors will be Keith Cowan and Prokopios (Akis) Tsirigakis, and their terms
will expire at the annual meeting of stockholders to be held in 2019;
|
|
●
|
the
Class II directors will be Lori Tauber Marcus and Kathy Tan Mayor, and their terms will
expire at the annual meeting of stockholders to be held in 2020; and
|
|
●
|
the
Class III directors will be Alan S. Knitowski, Randall Crowder and George Syllantavos,
and their terms will expire at the annual meeting of stockholders to be held in 2021.
|
Our
certificate of incorporation and bylaws provide that the number of directors shall consist of one or more members, and may be
increased or decreased from time to time by a resolution of our board of directors. Each director’s term continues until
the election and qualification of his successor, or his earlier death, resignation, or removal. Any increase or decrease in the
number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third
of the total number of directors. This classification of our board of directors may have the effect of delaying or preventing
changes in control of our company.
Each
of our executive officers serves at the discretion of our board of directors and will hold office until his or her successor is
duly appointed and qualified or until his or her earlier resignation or removal. There are no family relationships among any of
our directors or executive officers.
Director
Independence
Our
common stock and warrants are listed on Nasdaq. Under the rules of Nasdaq, independent directors must comprise a majority of a
listed company’s board of directors. In addition, the rules of Nasdaq require that, subject to specified exceptions, each
member of a listed company’s audit, compensation, and nominating and corporate governance committees be independent. Under
the rules of Nasdaq, a director will only qualify as an “independent director” if, in the opinion of that company’s
board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director. Audit committee members must also satisfy the independence criteria set forth
in Rule 10A-3 under the Exchange Act. Compensation committee members must also satisfy the independence criteria set forth
in Rule 10C-1 under the Exchange Act.
In
order to be considered independent for purposes of Rule 10A-3 and Rule 10C-1, a member of an audit committee or compensation
committee of a listed company may not, other than in his or her capacity as a member of the committee, the board of directors,
or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the
listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.
We
have undertaken a review of the independence of each director and considered whether each director has a material relationship
with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities.
As a result of this review, we determined that Messrs. Cowan, Syllantavos and Tsirigakis and Mses. Marcus and Mayor, representing
five of PHUN’s seven directors, will be considered “independent directors” as defined under the applicable rules
and regulations of the SEC and the listing requirements and rules of Nasdaq.
Lead
Independent Director
We
believe that the structure of our board of directors and committees provides strong overall management. The Chair of our board
of directors and our Chief Executive Officer roles will be separate. Mr. Knitowski will serve as our Chief Executive Officer and
Mr. Prokopios (Akis) Tsirigakis will serve as Chair of our board of directors. This structure will enable each person to focus
on different aspects of company leadership. Our Chief Executive Officer will be responsible for setting the strategic direction
of our company, the general management and operation of the business and the guidance and oversight of senior management. The
Chair of our board of directors will monitor the content, quality and timeliness of information sent to our board of directors
and will be available for consultation with our board of directors regarding the oversight of its business affairs. Our independent
directors will bring experience, oversight and expertise from outside of Phunware, while Mr. Knitowski will bring company-specific
experience and expertise. As one of the founders of Phunware, Mr. Knitowski is best positioned to identify strategic priorities,
lead critical discussion and execute our business plans.
Committees
of the Board of Directors
Our
board of directors has the authority to appoint committees to perform certain management and administrative functions. Our board
of directors has an audit committee, a compensation committee, and a nominating and corporate governance committee, each of which
has the composition and responsibilities described below. Members serve on these committees until their resignation or until otherwise
determined by our board of directors.
Audit
Committee
Messrs.
Cowan and Tsirigakis and Ms. Mayor, each of whom is a non-employee member of our board of directors, comprise our audit committee.
Mr. Tsirigakis is the Chair of our audit committee. We have determined that each of the members of our audit committee satisfies
the requirements for independence and financial literacy under the rules of Nasdaq and the SEC. We have also determined that Mr.
Tsirigakis qualifies as an “audit committee financial expert” as defined in the SEC rules and satisfies the financial
sophistication requirements of Nasdaq. The audit committee is responsible for, among other things:
|
●
|
selecting
a qualified firm to serve as the independent registered public accounting firm to audit the Successor’s financial statements;
|
|
●
|
helping
to ensure the independence and performance of the independent registered public accounting firm;
|
|
●
|
discussing
the scope and results of the audit with the independent registered public accounting firm and reviewing, with management and
the independent registered public accounting firm, the Successor’s interim and year-end financial statements;
|
|
●
|
developing
procedures for employees to submit concerns anonymously about questionable accounting or audit matters;
|
|
●
|
reviewing
the Successor’s policies on and oversees risk assessment and risk management, including enterprise risk management;
|
|
●
|
reviewing
the adequacy and effectiveness of our internal control policies and procedures and the Successor’s disclosure controls
and procedures;
|
|
●
|
reviewing
related person transactions; and
|
|
●
|
approving
or, as required, pre-approving, all audit and all permissible non-audit services, other than de minimis non-audit services,
to be performed by the independent registered public accounting firm.
|
Our
board of directors has adopted a written charter for the audit committee that satisfies the applicable rules and regulations of
the SEC and the listing standards of Nasdaq.
Compensation
Committee
Ms.
Marcus and Messrs. Syllantavos and Tsirigakis, each of whom is a non-employee member of our board of directors, comprise our compensation
committee. Ms. Marcus is the Chair of our compensation committee. We have determined that each member of our compensation committee
meets the requirements for independence under the rules of Nasdaq and SEC rules and regulations. The compensation committee is
responsible for, among other things:
|
●
|
reviewing,
approving and determining the compensation of the Successor’s executive officers and key employees;
|
|
●
|
reviewing,
approving and determining compensation and benefits, including equity awards, to directors for service on the board of directors
or any committee thereof;
|
|
●
|
administering
the Successor’s equity compensation plans;
|
|
●
|
reviewing,
approving and making recommendations to the Successor’s board of directors regarding incentive compensation and equity
compensation plans; and
|
|
●
|
establishing
and reviewing general policies relating to compensation and benefits of the Successor’s employees.
|
Our
board of directors has adopted a written charter for the compensation committee that satisfies the applicable rules and regulations
of the SEC and the listing standards of Nasdaq.
Nominating
and Corporate Governance Committee
Mr.
Cowan and Mses. Marcus and Mayor, each of whom is a non-employee member of our board of directors, comprise our nominating and
corporate governance committee. Mr. Cowan is the Chair of our nominating and corporate governance committee. We have determined
that each member of our nominating and corporate governance committee meets the requirements for independence under the rules
of Nasdaq. The nominating and corporate governance committee is responsible for, among other things:
|
●
|
identifying,
evaluating and selecting, or making recommendations to our board of directors regarding, nominees for election to our board
of directors and its committees;
|
|
●
|
evaluating
the performance of our board of directors and of individual directors;
|
|
●
|
considering,
and making recommendations to our board of directors regarding, the composition of our board of directors and its committees;
|
|
●
|
reviewing
developments in corporate governance practices;
|
|
●
|
evaluating
the adequacy of our corporate governance practices and reporting; and
|
|
●
|
developing,
and making recommendations to our board of directors regarding, corporate governance guidelines and matters.
|
Our
board of directors has adopted a written charter for the nominating and corporate governance committee that satisfies the applicable
rules and regulations of the SEC and the listing standards of Nasdaq.
Compensation
Committee Interlocks and Insider Participation
None
of the members of our compensation committee is or has been an officer or employee of our company. None of our executive officers
currently serves, or in the past year has served, as a member of the compensation committee or director (or other board committee
performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity that has
one or more executive officers serving on our compensation committee or board of directors.
Non-Employee
Director Compensation
We
do not currently have a policy or plan to make equity award grants or pay cash retainers to our non-employee directors at a particular
time, of a particular value or of a particular amount. After the completion of this offering, we intend to implement a formal
policy pursuant to which our non-employee directors would be eligible to receive equity awards and cash retainers as compensation
for service on our board of directors and committees of our board of directors.
Fiscal
2017 Director Compensation Table
The
following table presents for each of Phunware’s directors serving during fiscal 2017, other than those who are Named Executive
Officers, information regarding their compensation paid to them for their services as directors for the year ended December 31,
2017. Other than as set forth in the table, we did not pay any compensation, make any equity awards or non-equity awards to or
pay any other compensation to any of our non-employee directors in 2017.
Name
|
|
Fees
Earned or Paid in Cash
($)
|
|
|
Stock
Option Awards
($)
(1)
|
|
|
Total
($)
|
|
Winston
Damarillo
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Chase
Fraser
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
John
Kahan
(2)
|
|
|
16,846
|
|
|
|
31,095
|
|
|
|
47,941
|
|
Eric
Manlunas
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Kevin
Landis
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Sundhiraj
Sharma
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
(1)
|
This column reflects
the aggregate grant date fair value of stock options granted during 2017 computed in accordance with the provisions of ASC
718,
Compensation—Stock Compensation
. The assumptions that we used to calculate these amounts are discussed in
the notes to Phunware’s audited consolidated financial statements for the year ended December 31, 2017. These amounts
do not reflect the actual economic value that will be realized by the director upon the vesting of the stock options, the
exercise of the stock options, or the sale of the common stock underlying such stock options.
|
(2)
|
As of December 31,
2017, Mr. Kahan held options to purchase a total of 175,000 shares of Phunware common stock. The option is subject to an early
exercise provision and is immediately exercisable. Shares subject to the option vest in 48 equal monthly installments beginning
on June 1, 2017, subject to continued service to us.
|
(3)
|
Messrs. Landis and
Sharma resigned from our board of directors on February 26, 2018 on February 7, 2018, respectively.
|
Cash
Compensation
In
2017, Mr. Kahan received a fee of $16,846 in cash for serving on our board of directors. We also reimbursed our directors for
reasonable travel expenses associated with attending meetings of our board and meetings of committees of our board.
We
expect to adopt an outside director compensation policy in connection with the consummation of the business combination.
EXECUTIVE
COMPENSATION
All
historical information presented in this section is information relating to Phunware.
Phunware’s
named executive officers for 2017, which consist of the person who served as our principal executive officer during 2017 and the
next two most highly compensated executive officers who served as executive officers in 2017, are as follows:
Alan
Knitowski, our Chief Executive Officer;
Luan
Dang, our Chief Technology Officer; and
Scott
Kenyon, our former Chief Operating Officer, who served in that position through February 2, 2018.
Summary
Compensation Table
The
following table sets forth information regarding the total compensation of our named executive officers for the year ended December
31, 2017:
Name and Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Non-Equity Incentive Plan Compensation
(1)
|
|
|
All Other Compensation
|
|
|
Total
|
|
Alan Knitowski Chief Executive Officer
|
|
|
2017
|
|
|
$
|
310,000
|
|
|
$
|
123,644
|
|
|
$
|
19,051
|
(2)
|
|
$
|
452,695
|
|
Luan Dang Chief Technology Officer
|
|
|
2017
|
|
|
$
|
200,000
|
|
|
$
|
66,475
|
|
|
$
|
25,358
|
(3)
|
|
$
|
291,833
|
|
Scott Kenyon Former Chief Operating Officer
|
|
|
2017
|
|
|
$
|
250,000
|
|
|
$
|
83,094
|
|
|
$
|
14,749
|
(4)
|
|
$
|
347,843
|
|
(1)
|
The reported amounts
represent payments earned under the 2017 Senior Staff Bonus Plan which were paid as discussed under the section titled “
Executive
Compensation in Relation to Phunware, Inc. — Executive Bonus Plan
.”
|
(2)
|
The amount disclosed
reflects the aggregate incremental costs of perquisites and other personal benefits, including, among other things, $16,818
paid by Phunware to Mr. Knitowski with respect to Phunware’s medical benefits policy.
|
(3)
|
The amount disclosed
reflects the aggregate incremental costs of perquisites and other personal benefits, including, among other things, $23,125
paid by Phunware to Mr. Dang with respect to Phunware’s medical benefits policy.
|
(4)
|
The amount disclosed
reflects the aggregate incremental costs of perquisites and other personal benefits, including, among other things, $12,516
paid by Phunware to Mr. Kenyon with respect to Phunware’s medical benefits policy.
|
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth information regarding outstanding stock options and other equity awards held by each of our named executive
officers as of December 31, 2017:
|
|
Option Awards
|
|
|
|
Grant
|
|
|
Number of Securities Underlying Unexercised Options
|
|
|
Option Exercise
|
|
|
Option Expiration
|
|
Name
|
|
Date
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
|
Date
|
|
Alan Knitowski
|
|
|
2/24/2013
|
|
|
|
500,000
|
(1)
|
|
|
—
|
|
|
$
|
0.2539
|
|
|
|
2/24/2023
|
|
Luan Dang
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Scott Kenyon
|
|
|
5/30/2014
|
|
|
|
40,000
|
(2)
|
|
|
—
|
|
|
$
|
0.29
|
|
|
|
5/30/2024
|
|
|
|
|
10/20/2015
|
|
|
|
125,000
|
(3)
|
|
|
—
|
|
|
$
|
0.24
|
|
|
|
10/20/2025
|
|
(1)
|
Shares subject to the
option are fully vested and immediately exercisable.
|
(2)
|
The option is subject
to an early exercise provision and is immediately exercisable. The remaining 4,167 unvested shares vest in five equal monthly
installments beginning on January 1, 2018, subject to continued service to us. Mr. Kenyon resigned effective as of February
2, 2018 and as such, 37,500 of his vested shares remain exercisable until May 2, 2018.
|
(3)
|
The option is subject
to an early exercise provision and is immediately exercisable. The remaining 54,688 unvested shares vest 21 equal monthly
installments beginning on January 21, 2018, subject to continued service to us. Mr. Kenyon resigned from his position as an
executive officer of Phunware effective February 2, 2018. Mr. Kenyon resigned effective as of February 2, 2018 and as such,
72,916 of his vested shares remain exercisable until May 2, 2018.
|
Executive
Employment Agreements
Phunware has entered into employment agreements
with each executive offer and significant employee noted in the section titled “
Management
” above. Phunware
did not have an employment agreement or offer letter in place with Scott Kenyon, whose at-will employment with Phunware terminated
as of February 2, 2018.
Executive
Bonus Plan
Each
of our named executive officers participated in our 2017 Senior Staff Bonus Plan. The 2017 Senior Staff Bonus Plan provided for
bonus payments to eligible employees determined based upon our achievement of annual performance objectives. Funding of the 2017
Senior Staff Bonus Plan was based upon our achievement of performance targets that measured revenue, gross margin percentage,
subscription and services bookings, and Adjusted EBITDA, as well as the achievement by the employee of his or her performance
goals or objectives, adjusted upward or downward to the extent that the Company exceeded or did not meet these targets. Bonus
payments were conditioned on the Company achieving a minimum percentage threshold of these targets, and funding of the 2017 Senior
Staff Bonus Plan scaled upward to the extent the Company exceeded these minimum percentages. Payments were made annually for the
2017 Senior Staff Bonus Plan. The target bonuses at 100% funding for each named executive officer under the 2017 Senior Staff
Bonus Plan were: Mr. Knitowski: $186,000; Mr. Dang: $100,000; and Mr. Kenyon: $125,000. The annual payments made under the 2017
Senior Staff Bonus Plan to each named executive officer are reflected above under
“— Summary Compensation Table.”
Employee
Benefit and Stock Plans
2018
Equity Incentive Plan
In
connection with the consummation of the Business Combination, our board of directors adopted, and our stockholders approved, the
2018 Equity Incentive Plan (the “2018 Plan”). The purposes of the 2018 Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional incentives to employees, directors and consultants
who perform services to the Successor or any parent or subsidiary, and to promote the success of our business. These incentives
are provided through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance
units and performance shares.
Authorized
Shares
. A total of 2,729,416 shares of common stock are reserved for issuance pursuant to the 2018 Plan. In addition,
the shares of common stock reserved for issuance under the 2018 Plan also will include any shares of common stock subject to stock
options, restricted stock units or similar awards granted under the 2009 Equity Incentive Plan (the “2009 Plan”),
that, on or after the Business Combination, are assumed in connection with the Business Combination, expire or otherwise terminate
without having been exercised in full and shares of common stock issued pursuant to awards granted under the 2009 Plan that, on
or after the Business Combination, are forfeited to or repurchased by us, with the maximum number of shares of common stock that
may be added to the 2018 Plan pursuant to the foregoing equal to 2,372,893. Currently, no awards have been granted under the 2018 Plan.
The
number of shares of common stock available for issuance under the 2018 Plan will also include an annual increase on the first
day of each fiscal year beginning in fiscal 2019, equal to the least of:
|
●
|
10% of the post-closing
outstanding shares of common stock;
|
|
●
|
5% of the outstanding
shares of common stock on the last day of the immediately preceding fiscal year; or
|
|
●
|
such other amount
as our board of directors may determine.
|
If
an award expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an exchange program,
or, with respect to restricted stock, restricted stock units, performance units or performance shares, is forfeited to, or repurchased
by, the Successor due to failure to vest, then the unpurchased shares (or for awards other than stock options or stock appreciation
rights, the forfeited or repurchased shares) will become available for future grant or sale under the 2018 Plan (unless the 2018
Plan has terminated). With respect to stock appreciation rights, the net shares issued will cease to be available under the 2018
Plan and all remaining shares will remain available for future grant or sale under the 2018 Plan. Shares used to pay the exercise
price of an award or to satisfy the tax withholding obligations related to an award will become available for future grant or
sale under the 2018 Plan. To the extent an award is paid out in cash rather than shares, such cash payment will not result in
a reduction in the number of shares available for issuance under the 2018 Plan.
Adjustments
to Shares Subject to the 2018 Plan
. In the event of any dividend or other distribution (whether in the form of cash, shares,
other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase, or exchange of shares or other securities of the Successor, or other change in the
corporate structure affecting the common stock occurs, the administrator (as defined below), in order to prevent diminution or
enlargement of the benefits or potential benefits intended to be made available under the 2018 Plan, will adjust the number and
class of shares that may be delivered under the 2018 Plan, and/or the number, class and price of shares covered by outstanding
awards, and the numerical share limitations in the 2018 Plan.
Administration
.
Our board of directors or one or more committees appointed by our board of directors administers the 2018 Plan (referred to as
the “
administrator
”). If the administrator determines it is desirable to qualify transactions under the 2018
Plan as exempt under Rule 16b-3 of the Exchange Act, such transactions will be structured to satisfy the requirements for exemption
under Rule 16b-3. Subject to the provisions of the 2018 Plan, the administrator has the power to administer the 2018 Plan, including
but not limited to, the power to interpret the terms of the 2018 Plan and awards granted under it, to prescribed, amend and rescind
rules relating to the 2018 Plan, including creating sub-plans, and to determine the terms of the awards, including the exercise
price, the number of shares of common stock subject to each such award, the exercisability of the awards and the form of consideration,
if any, payable upon exercise. The administrator also has the authority to amend existing awards to reduce or increase their exercise
prices, to allow participants the opportunity to transfer outstanding awards to a financial institution or other person or entity
selected by the administrator and to institute an exchange program by which outstanding awards may be surrendered or cancelled
in exchange for awards of the same type which may have a higher or lower exercise price or different terms, awards of a different
type and/or cash.
Eligibility
.
Awards may be granted to employees, directors and consultants of the Company and employees and consultants of any parent or subsidiary
corporation of the Company. Incentive stock options may be granted only to employees who, as of the time of grant, are employees
of the Successor or any parent or subsidiary corporation of the Company.
Stock
Options
. Stock options in the form of nonstatutory stock options or incentive stock options may be granted under the 2018
Plan. The administrator determines the number of shares subject to each option. The administrator determines the exercise price
of options granted under the 2018 Plan, provided that the exercise price must at least be equal to the fair market value of the
Successor’s common stock on the date of grant. The term of an incentive stock option may not exceed ten years, except that
with respect to any participant who owns more than 10% of the voting power of all classes of the outstanding stock, the term must
not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator
will determine the methods of payment of the exercise price of an option, which may include cash, shares or other property acceptable
to the administrator, as well as other types of consideration permitted by applicable law. After the termination of service of
an employee, director or consultant, he or she may exercise his or her option for the period of time stated in his or her option
agreement. Generally, if termination is due to death or disability, the option will remain exercisable for 12 months. In all other
cases, the option generally will remain exercisable for three months following the termination of service. An option may not be
exercised later than the expiration of its term. Subject to the provisions of the 2018 Plan, the administrator determines the
other terms of options.
Stock
Appreciation Rights
. Stock appreciation rights may be granted under the 2018 Plan. Stock appreciation rights allow the
recipient to receive the appreciation in the fair market value of common stock between the exercise date and the date of grant.
Stock appreciation rights may not have a term exceeding ten years. After the termination of service of an employee, director or
consultant, he or she may exercise his or her stock appreciation right for the period of time stated in his or her stock appreciation
rights agreement. Generally, the terms and conditions relating to the period of post-termination exercise with respect to options
described above also apply to stock appreciation rights, however, in no event may a stock appreciation right be exercised later
than the expiration of its term. Subject to the provisions of the 2018 Plan, the administrator determines the other terms of stock
appreciation rights, including when such rights become exercisable and whether to pay any increased appreciation in cash or with
shares of common stock, or a combination thereof, except that the per share exercise price for the shares to be issued pursuant
to the exercise of a stock appreciation right will be no less than 100% of the fair market value per share on the date of grant.
Restricted
Stock Awards
. Restricted stock may be granted under the 2018 Plan. Restricted stock awards are grants of shares of common
stock that vest in accordance with terms and conditions established by the administrator. The administrator will determine the
number of shares of restricted stock granted to any employee, director or consultant and, subject to the provisions of the 2018
Plan, will determine the terms and conditions of such awards. The administrator may impose whatever conditions to vesting it determines
to be appropriate (for example, the administrator may set restrictions based on the achievement of specific performance goals
or continued service to the Company); provided, however, that the administrator, in its sole discretion, may accelerate the time
at which any restrictions will lapse or be removed. Recipients of restricted stock awards generally will have voting and dividend
rights with respect to such shares upon grant without regard to vesting, unless the administrator provides otherwise. Shares of
restricted stock that do not vest are subject to our right of repurchase or forfeiture.
Restricted
Stock Units
. Restricted stock units may be granted under the 2018 Plan. Restricted stock units are bookkeeping entries
representing an amount equal to the fair market value of one share of common stock. Subject to the provisions of the 2018 Plan,
the administrator determines the terms and conditions of restricted stock units, including the vesting criteria (which may include
accomplishing specified performance criteria or continued service to the Company) and the form and timing of payment. Notwithstanding
the foregoing, the administrator, in its sole discretion, may reduce or waive any vesting criteria that must be met to receive
a payout.
Performance
Units and Performance Shares
. Performance units and performance shares may be granted under the 2018 Plan. Performance
units and performance shares are awards that will result in a payment to a participant only if performance goals established by
the administrator are achieved or the awards otherwise vest. The administrator will establish organizational or individual performance
goals or other vesting criteria in its discretion, which, depending on the extent to which they are met, will determine the number
and/or the value of performance units and performance shares to be paid out to participants. After the grant of a performance
unit or performance share, the administrator, in its sole discretion, may reduce or waive any performance criteria or other vesting
provisions for such performance units or performance shares. Performance units shall have an initial dollar value established
by the administrator on or prior to the grant date. Performance shares shall have an initial value equal to the fair market value
of common stock on the grant date. The administrator, in its sole discretion, may pay earned performance units or performance
shares in the form of cash, in shares of common stock or in some combination thereof.
Transferability
of Awards
. Unless the administrator provides otherwise, the 2018 Plan generally does not allow for the transfer of awards
and only the recipient of an award may exercise an award during his or her lifetime.
Dissolution
or Liquidation
. In the event of a proposed liquidation or dissolution of the Company, the administrator will notify participants
as soon as practicable prior to the effective date of such proposed transaction, and, to the extent not exercised, all awards
will terminate immediately prior to the consummation of such proposed transaction.
Merger
or Change in Control
. The 2018 Plan provides that in the event of a merger or change in control, as defined under the
2018 Plan, each outstanding award will be treated as the administrator determines, except that if a successor corporation or its
parent or subsidiary does not assume or substitute an equivalent award for any outstanding award, then such award will fully vest,
all restrictions on such award will lapse, all performance goals or other vesting criteria applicable to such award will be deemed
achieved at 100% of target levels. In addition, if an option or stock appreciation right is not assumed or substituted, the administrator
will notify the participant in writing or electronically that the option or stock appreciation right will become fully exercisable,
for a specified period prior to the transaction, and will then terminate upon the expiration of the specified period of time.
Upon a change in control, awards granted to an outside director will vest fully and become immediately exercisable, all restrictions
on his or her restricted stock and restricted stock units will lapse, and with respect to awards with performance-based vesting,
all performance goals or other vesting criteria will be deemed achieved at 100% of target levels, and all other terms and conditions
met.
Amendment;
Termination
. The administrator has the authority to amend, alter, suspend, or terminate the 2018 Plan provided such action
does not impair the existing rights of any participant. The 2018 Plan automatically will terminate in 2028, unless it is terminated
sooner.
2018
Employee Stock Purchase Plan
In
connection with the consummation of the Business Combination, our board of directors adopted, and our stockholders approved, the
2018 Employee Stock Purchase Plan (the “2018 ESPP”). The purpose of the 2018 ESPP is to provide eligible employees
with an opportunity to purchase shares of our common stock through accumulated contributions, which generally will be made through
payroll deductions. The 2018 ESPP permits the administrator (as discussed below) to grant purchase rights that qualify for preferential
tax treatment under Code Section 423. In addition, the 2018 ESPP authorizes the grant of purchase rights that do not qualify under
Code Section 423 pursuant to rules, procedures or sub-plans adopted by the administrator that are designed to achieve desired
tax or other objectives.
Authorized
Shares
. 1,228,237 shares of common stock are available for sale under the 2018 ESPP. The number of shares of common
stock that may be made available for sale under the 2018 ESPP also includes an annual increase on the first day of each
fiscal year beginning for the fiscal year following the fiscal year in which the first enrollment date (if any) occurs equal
to the least of:
|
●
|
3% of the expected
post-closing outstanding shares of common stock;
|
|
●
|
1.5% of the outstanding
shares of common stock on the last day of the immediately preceding fiscal year; or
|
|
●
|
such other amount
as the administrator may determine.
|
2018
ESPP Administration
. The 2018 ESPP will be administered by our board of directors or a committee appointed by the board
(the “administrator”). The administrator has full and exclusive discretionary authority to construe, interpret, and
apply the terms of the 2018 ESPP, to designate separate offerings under the 2018 ESPP, to adjudicate disputed claims under the
2018 ESPP, and to establish such procedures that it deems necessary for the administration of the 2018 ESPP. The administrator
is specifically authorized to adopt rules and procedures regarding eligibility to participate, the definition of “compensation,”
handling of contributions, and making of contributions to the 2018 ESPP, among other responsibilities. Every finding, decision
and determination made by the administrator will, to the full extent permitted by law, be final and binding upon all parties.
Eligibility
.
Any eligible employee on a given enrollment date will be eligible to participate in the 2018 ESPP. Generally, all of our employees
will be eligible to participate if they are employed by the Company, or any participating subsidiary, for at least 20 hours per
week and more than five months in any calendar year. However, an employee may not be granted rights to purchase shares of common
stock under the 2018 ESPP if such employee:
|
●
|
immediately after
the grant would own capital stock and/or hold outstanding options to purchase 5% or more of the total combined voting power
or value of all classes of capital stock; or
|
|
●
|
hold rights to purchase
shares of common stock under all of our employee stock purchase plans that accrue at a rate that exceeds $25,000 worth of
shares of common stock for each calendar year.
|
Offering
Periods
. The offering periods under the 2018 ESPP will begin on such date as determined by the administrator and expire
on the earliest to occur of (a) the completion of the purchase of shares on the last exercise date occurring within 27 months
of the applicable enrollment date of the offering period on which the purchase right was granted, or (b) a shorter period established
by the administrator prior to an enrollment date for all options to be granted on such enrollment date.
An
eligible employee may participate in the 2018 ESPP by timely submitting a properly completed subscription agreement or following
an electronic or other enrollment procedure determined by the administrator. On the enrollment date of each offering period, each
participant automatically is granted a right to purchase shares of common stock. This purchase right is exercised on each purchase
date during an offering period to the extent of the contributions made during such offering period, unless the purchase right
has expired (upon termination of a participant’s employment) or the participant has withdrawn from the 2018 ESPP, as described
in further detail below.
Once
an employee becomes a participant in the 2018 ESPP, the employee automatically will participate in each successive offering period
until the employee withdraws from the 2018 ESPP or the employee’s employment with the Company or one of our designated subsidiaries
terminates.
Contributions
.
The 2018 ESPP permits participants to purchase shares of common stock through contributions (generally in the form of payroll
deductions) of up to an amount of their eligible compensation determined by the administrator. Eligible compensation includes
a participant’s base straight time gross earnings, but exclusive of payments for incentive compensation, bonuses, payments
for overtime and shift premium, equity compensation income and other similar compensation. Unless otherwise determined by the
administrator, a participant may purchase a maximum of 2,000 shares of common stock during a purchase period.
Exercise
of Purchase Right
.
Amounts deducted and accumulated by the participant are used to purchase shares of common stock
on each exercise date. The purchase price of the shares will determined by the administrator but in no event will be less than
85% of the lower of the fair market value of common stock on the enrollment date or on the exercise date. Participants may end
their participation at any time during an offering period and will be paid their accrued contributions that have not yet been
used to purchase shares of common stock. Participation ends automatically upon termination of employment with the Company.
Non-Transferability
.
Neither contributions credited to a participant’s account nor any rights with regard to the exercise of a purchase right
or to receive shares under the 2018 ESPP may be assigned, transferred, pledged or otherwise disposed of in any way, other than
by will, the laws of descent and distribution or as otherwise provided under the 2018 ESPP.
Changes
in Capitalization
. If there is any dividend or other distribution (whether in the form of cash, common stock, other securities,
or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of common stock or other securities of the Successor, or other change in the corporate structure
of the Company affecting common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the 2018 ESPP, then the administrator will adjust the number
and class of common stock that may be delivered under the 2018 ESPP, the purchase price per share, the number of shares of common
stock covered by each right to purchase shares under the 2018 ESPP that has not yet been exercised, and the numerical limitations
set forth in the 2018 ESPP.
Dissolution
or Liquidation
. In the event of the proposed dissolution or liquidation of the Company, any offering period then in progress
will be shortened by setting a new purchase date and any offering periods will end on the new purchase date. The new purchase
date will be prior to the proposed dissolution or liquidation. The administrator will notify each participant in writing or electronically
prior to the new purchase date that the purchase date has been changed to the new purchase date and that the right to purchase
shares under the 2018 ESPP will be exercised automatically on the new purchase date, unless the participant has already withdrawn
from the offering period prior to such date.
Change
in Control
. If there is a merger or “change in control,” as defined in the 2018 ESPP, each right to purchase
shares under the 2018 ESPP will be assumed or an equivalent right to purchase shares will be substituted by the successor corporation
or a parent or subsidiary of such successor corporation. If the successor corporation refuses to assume or substitute for the
2018 ESPP purchase rights, the offering period covered by such 2018 ESPP purchase right by setting a new purchase date on which
such offering period will end. The new purchase date will be before the proposed merger or change in control. The administrator
will notify each participant in writing or electronically prior to the new purchase date that the purchase date has been changed
to the new purchase date and that the right to purchase shares under the 2018 ESPP will be exercised automatically on the new
purchase date, unless the participant has already withdrawn from the offering period prior to such date.
Amendment;
Termination
. The administrator, in its sole discretion, may amend, suspend or terminate the 2018 ESPP, subject to its
terms. The 2018 ESPP automatically will terminate in 2038, unless we terminate it sooner.
2009
Equity Incentive Plan
In
February 2009, the Phunware board of directors adopted, and the Phunware stockholders approved, the 2009 Plan. The 2009 Plan was
most recently amended in December 2017. The 2009 Plan permits the grant of incentive stock options, within the meaning of Section
422 of the Code, to Phunware employees and any parent and subsidiary corporations’ employees, and for the grant of nonstatutory
stock options, stock appreciation rights, restricted stock, and restricted stock units to Phunware employees, directors and consultants
and Phunware’s parent and subsidiary corporations’ employees and consultants. In addition, the 2009 Plan permits the
grant of EMI stock options, which are options granted under the 2009 Plan to an eligible employee which is a qualifying option
as defined in paragraph 1(2) of Schedule 5 (“Schedule 5”), to the United Kingdom Income Tax (Earnings and Pensions)
Act 2003 (“ITEPA 2003”). EMI stock options (“EMI Options”), may only be granted to Phunware employees
and any parent and subsidiary corporations’ employees whose time the employee is required to spend on Phunware business
or that of any subsidiary (including any time which the employee would have been so required to spend but for permitted absence
(as such term is defined in the 2009 Plan)) is not less than twenty-five (25) hours per week, or, if less, 75% of this working
time and who does not have a material interest (as such term is defined in the 2009 Plan) in Phunware or any subsidiary corporation.
Authorized
Shares
.
The 2009 Plan terminated in connection with the consummation of the Business Combination, and accordingly,
no shares will be available for issuance under the 2009 Plan following the consummation of the Business Combination. The 2009
Plan will continue to govern outstanding awards granted thereunder. As of December 26, 2018, options to purchase 2,372,893 shares
of our common stock remained outstanding under the 2009 Plan.
Plan
Administration
.
Phunware’s board of directors or one or more committees appointed by the Phunware board of
directors administers the 2009 Plan (the “administrator”). Subject to the provisions of the 2009 Plan, the administrator
has the power to administer the 2009 Plan, including but not limited to, the power to interpret the terms of the 2009 Plan and
awards granted under it, to prescribe, amend and rescind rules relating to the 2009 Plan, including creating sub-plans, and to
determine the terms of the awards, including the exercise price, the number of shares of Phunware’s common stock subject
to each such award, the exercisability of the awards, any conditions attaching to the shares under an award which makes the shares
“restricted securities” or “restricted interest in securities” within the meaning of ITEPA 2003 (if applicable),
and the form of consideration, if any, payable upon exercise. The administrator also has the authority to amend existing awards,
including the power to extend the post-termination exercisability period of awards and to extend the maximum term of an option
and to allow participants to defer the receipt of the payment of cash or the delivery of shares that otherwise would be due to
such participant under an award. The administrator also has the authority to amend existing awards to reduce or increase their
exercise prices, to allow participants the opportunity to transfer outstanding awards to a financial institution or other person
or entity selected by the administrator and to institute an exchange program by which outstanding awards may be surrendered or
cancelled in exchange for awards of the same type which may have a higher or lower exercise price or different terms, awards of
a different type and/or cash and to make all other determinations the administrator deems necessary or advisable for administering
the 2009 Plan.
Options
(other than EMI Options)
. Stock options may be granted under the 2009 Plan. The exercise price of options granted under
the 2009 Plan must at least be equal to the fair market value of Phunware’s common stock on the date of grant. The term
of an option may not exceed ten years, except that with respect to incentive stock options, any participant who owns more than
10% of the voting power of all classes of Phunware’s outstanding stock, the term must not exceed five years and the exercise
price must equal at least 110% of the fair market value on the grant date. The administrator will determine the methods of payment
of the exercise price of an option, which may include cash, shares or other property acceptable to the administrator, as well
as other types of consideration permitted by applicable law. After termination of an employee, director or consultant, he or she
may exercise his or her option for the period of time as specified in the applicable option agreement. If termination is due to
death or disability, the option generally will remain exercisable for at least 12 months. In all other cases, the option will
generally remain exercisable for at least three months. However, in no event may an option be exercised later than the expiration
of its term. Subject to the provisions of the 2009 Plan, the administrator determines the other terms of options.
EMI
Options
. EMI Options may be granted under the 2009 Plan. An option may only be an EMI Option if Phunware was a qualifying
company, within the meaning of Schedule 5, on the date of grant and if the option is granted for commercial reasons in order to
recruit or retain an eligible employee (as such term is defined in the 2009 Plan) and not as part of a scheme or arrangement for
the main purpose (or one of the main purposes) of which is the avoidance of tax. In addition, certain limitations, as described
in the 2009 Plan, with respect to the total value of shares that may be treated as EMI Options apply. If an option does not comply
with the requirements of Schedule 5 and as a result, the option is not an EMI Option, or the extent the limits described in the
2009 Plan are not met, the option will be a nonstatutory stock option. Except as noted herein, the provisions applicable to nonstatutory
stock options described above will also apply to EMI Options.
Stock
Appreciation Rights
. Stock appreciation rights may be granted under the 2009 Plan. Stock appreciation rights allow the
recipient to receive the appreciation in the fair market value of Phunware common stock between the exercise date and the date
of grant. Stock appreciation rights may not have a term exceeding ten years. After the termination of service of an employee,
director or consultant, he or she may exercise his or her stock appreciation right for the period of time stated in his or her
award agreement. However, in no event may a stock appreciation right be exercised later than the expiration of its term. Subject
to the provisions of the 2009 Plan, the administrator determines the other terms of stock appreciation rights, including when
such rights become exercisable and whether to pay any increased appreciation in cash or with shares of Phunware common stock,
or a combination thereof, except that the per share exercise price for the shares of Phunware common stock to be issued pursuant
to the exercise of a stock appreciation right will be no less than 100% of the fair market value per share on the date of grant.
Restricted
Stock
. Restricted stock may be granted under the 2009 Plan. Restricted stock awards are grants of shares of Phunware common
stock that vest in accordance with terms and conditions established by the administrator. The administrator will determine the
number of shares of restricted stock granted to any employee, director or consultant and, subject to the provisions of the 2009
Plan, will determine the terms and conditions of such awards. The administrator may impose whatever conditions for lapse of the
restriction on the shares it determines to be appropriate (for example, the administrator may set restrictions based on the achievement
of specific performance goals or continued service); provided, however, that the administrator, in its discretion, may accelerate
the time at which any restrictions will lapse or be removed. Recipients of restricted stock awards generally will have voting
and dividend rights with respect to such shares upon grant without regard to the restriction, unless the administrator provides
otherwise. Shares of restricted stock as to which the restrictions have not lapsed are subject to Phunware’s right of repurchase
or forfeiture.
Restricted
Stock Units
.
Restricted stock units may be granted under the 2009 Plan. Restricted stock units are bookkeeping
entries representing an amount equal to the fair market value of one share Phunware’s common stock. Subject to the provisions
of the 2009, the administrator will determine the terms and conditions of restricted stock units, including the vesting criteria
(which may include accomplishing specified performance criteria or continued service) and the form and timing of payment. Notwithstanding
the foregoing, the administrator, in its sole discretion, may reduce or waive any vesting criteria that must be met to receive
a payout.
Non-Transferability
of Awards
.
Unless the administrator provides otherwise (excluding EMI Options), the 2009 Plan generally does not
allow for the transfer of awards and only the recipient of an award may exercise an award during his or her lifetime. An EMI Option
is personal to the participant and may not be transferred and only the recipient of an EMI Option may exercise such award during
his or her lifetime.
Certain
Adjustments
.
In the event of certain changes in Phunware’s capitalization, to prevent diminution or enlargement
of the benefits or potential benefits available under the 2009 Plan, the administrator will adjust the number and class of shares
that may be delivered under the 2009 Plan and/or the number, class and price of shares covered by each outstanding award.
Dissolution
or Liquidation
. In the event of Phunware’s proposed liquidation or dissolution, the administrator will notify participants
as soon as practicable prior to the date of such proposed action and, to the extent not exercised, all awards will terminate immediately
prior to the consummation of such proposed transaction.
Merger
or Change in Control
.
The 2009 Plan provides that in the event of a merger or change in control, as defined under
the 2009 Plan, each outstanding award will be treated as the administrator determines If a successor corporation or its parent
or subsidiary does not assume or substitute an equivalent award for any outstanding award, then such award will fully vest, all
restrictions on the shares subject to such award will lapse, all performance goals or other vesting criteria applicable to the
shares subject to such award will be deemed achieved at 100% of target levels and all of the shares subject to such award will
become fully exercisable, if applicable, for a specified period prior to the transaction. The award will then terminate upon the
expiration of the specified period of time. If an option or stock appreciation right becomes fully vested and exercisable in connection
with a change in control due to the successor corporation’s refusal to assume the award, the administrator will notify the
applicable participant in writing or electronically that the award will be exercisable for a period of time determined by the
administrator, and the option or stock appreciation right will terminate upon the expiration of such period.
Amendment;
Termination
.
The Phunware board of directors has the authority to amend, alter, suspend or terminate the 2009 Plan,
provided such action will not impair the existing rights of any participant, unless mutually agreed to in writing between the
participant and the administrator. As noted above, upon the consummation of the Business Combination, the 2009 Plan terminated
and no further awards will be granted thereunder. All outstanding awards will continue to be governed by their existing terms.
Executive
Incentive Compensation Plan
The
Phunware board of directors intends to adopt an Executive Incentive Compensation Plan (the “Incentive Compensation Plan”).
The Incentive Compensation Plan allows a committee appointed by the board of directors to provide cash incentive awards to employees
selected by the committee, including the named executive officers, based upon performance goals established by the committee.
Under
the Incentive Compensation Plan, the committee determines the performance goals applicable to any award, which goals may include,
without limitation, the attainment of research and development milestones, sales bookings, business divestitures and acquisitions,
cash flow, cash position, earnings (which may include any calculation of earnings, including but not limited to earnings before
interest and taxes, earnings before taxes, earnings before interest, taxes, depreciation and amortization and net earnings), earnings
per share, net income, net profit, net sales, operating cash flow, operating expenses, operating income, operating margin, overhead
or other expense reduction, product defect measures, product release timelines, productivity, profit, return on assets, return
on capital, return on equity, return on investment, return on sales, revenue, revenue growth, sales results, sales growth, stock
price, time to market, total stockholder return, working capital and individual objectives such as peer reviews or other subjective
or objective criteria. The performance goals may differ from participant to participant and from award to award.
Our
compensation committee is expected to administer the Incentive Compensation Plan. The administrator of the Incentive Compensation
Plan may, in its sole discretion and at any time, increase, reduce or eliminate a participant’s actual award, and/or increase,
reduce or eliminate the amount allocated to the bonus pool for a particular performance period. The actual award may be below,
at or above a participant’s target award, in the discretion of the administrator. The administrator may determine the amount
of any reduction on the basis of such factors as it deems relevant, and it is not required to establish any allocation or weighting
with respect to the factors it considers.
Actual
awards are paid in cash only after they are earned, which usually requires continued employment through the last day of the performance
period. Payment of awards occurs as soon as practicable after the performance period during which the award is earned, but no
later than the dates set forth in the Incentive Compensation Plan.
The
board of directors has the authority to amend or terminate the Incentive Compensation Plan, provided such action does not impair
the existing rights of any participant with respect to any earned awards.
Limitation
on Liability and Indemnification Matters
As
permitted under Delaware law, our amended and restated certificate of incorporation and amended and restated bylaws provide that
we will indemnify our directors and officers and may indemnify our employees and other agents, to the fullest extent permitted
by Delaware law. Delaware law prohibits our amended and restated certificate of incorporation from limiting the liability of our
directors for any of the following:
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any breach of a director’s
duty of loyalty to us or to our stockholders;
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acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of law;
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unlawful payment of
dividends or unlawful stock repurchases or redemptions; and
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any transaction from
which a director derived an improper personal benefit.
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If
Delaware law is amended to authorize corporate action further eliminating or limiting the personal liability of a director, then
the liability of our directors will be eliminated or limited to the fullest extent permitted by Delaware law, as so amended. Our
amended and restated certificate of incorporation will not eliminate a director’s duty of care and, in appropriate circumstances,
equitable remedies, such as injunctive or other forms of non-monetary relief, remain available under Delaware law. This provision
also will not affect a director’s responsibilities under any other laws, such as the federal securities laws or other state
or federal laws. Under our amended and restated bylaws, we will also be empowered to purchase insurance on behalf of any person
whom we are required or permitted to indemnify.
In
addition to the indemnification required in our amended and restated certificate of incorporation and amended and restated bylaws,
we have entered into an indemnification agreement with each member of our board of directors. These agreements provide for the
indemnification of our directors, officers and some employees for certain expenses and liabilities incurred in connection with
any action, suit, proceeding or alternative dispute resolution mechanism, or hearing, inquiry or investigation that may lead to
the foregoing, to which they are a party, or are threatened to be made a party, by reason of the fact that they are or were a
director, officer, employee, agent or fiduciary of our company, or any of our subsidiaries, by reason of any action or inaction
by them while serving as a director, officer, employee, agent or fiduciary, or by reason of the fact that they were serving at
our request as a director, officer, employee, agent or fiduciary of another entity. In the case of an action or proceeding by
or in the right of our company or any of our subsidiaries, no indemnification will be provided for any claim where a court determines
that the indemnified party is prohibited from receiving indemnification. We believe that these charter and bylaw provisions and
indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
The
limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and
restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They
may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful,
might benefit us and our stockholders. Moreover, a stockholder’s investment may be harmed to the extent we pay the costs
of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is, therefore, unenforceable. There is no pending litigation or proceeding
naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened
litigation that may result in claims for indemnification by any director or officer.
CERTAIN
RELATIONSHIPS, RELATED PARTY AND OTHER TRANSACTIONS
Phunware
Related Person Transactions
In
addition to the director and executive officer compensation arrangements and indemnification arrangements discussed above in the
section titled “
Executive Compensation
,” the following is a description of transactions and series of similar
transactions, during our last three fiscal years, to which Phunware was a party prior to the consummation of the business combination,
in which:
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the
amounts involved exceeded or will exceed $120,000; and
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any
of our directors, executive officers or beneficial holders of more than 5% of any class
of our capital stock, or any immediate family member of such related person, had or will
have a direct or indirect material interest
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Other
than compensation arrangements with the Phunware directors and executive officers, the following is a description of certain relationships
and transactions during the last three years involving our directors, executive officers, beneficial holders of more than 5% of
our capital stock, or entities affiliated with them.
Investors’
Rights Agreement
Phunware
is party to an investors’ rights agreement that provides, among other things, that holders of Phunware’s preferred
stock, including stockholders affiliated with some of its directors, have the right to demand that Phunware file a registration
statement or request that their shares be covered by a registration statement that it is otherwise filing. For a more detailed
description of these registration rights, see the section titled “
Description of Phunware, Inc. Securities — Registration
Rights
.”
Maxima
Capital Management Transactions
On
August 26, 2015, we entered into a consulting agreement with Maxima, one of our investors. Pursuant to such agreement, Maxima
was paid $50,000 per month for twelve months. We recognized consulting expense of $450,000 and $150,000 during the years ended
December 31, 2016 and 2015, respectively, related to this agreement. On September 4, 2015, entities affiliated with Maxima invested
$1,100,000 in our convertible promissory notes pursuant to a note subscription agreement. Additionally, entities affiliated with
Maxima have invested in our Series B, C, E and F convertible preferred stock financings. We owed Maxima $150,000 at December 31,
2016 and this balance was subsequently paid.
Phunware
Related Person Policy
As
a privately held company, Phunware was not required to maintain a Related Person Policy. Following consummation of the business
combination, Phunware became subject to our Policies and Procedures for Related Person Transactions described in this section.
With
respect to the consolidated financial statements of Phunware and subsidiaries contained elsewhere in this prospectus, Phunware
was subject to Auditing Standard No. 18 of the Public Company Accounting Oversight Board, which requires auditors to evaluate
a company’s identification of, accounting for and disclosure of related party relationships and transactions.
Stellar
Related Person Transactions
The
information from the section titled “
Description of Securities—Registration Rights
” is incorporated by
reference herein. The following is a description of transactions and series of similar transactions, during the last three fiscal
years, to which Stellar was a party prior to the consummation of the business combination.
The
initial shareholders currently own 2,003,403 shares of common stock. 2,300,000 shares were initially purchased by Messrs. Tsirigakis
and Syllantavos in January 2016 for an aggregate of $25,000. In January 2016, Messrs. Tsirigakis and Syllantavos collectively
transferred an aggregate of 2,099,900 shares to the Sponsors and an aggregate of 34,500 shares to our director nominees. In addition,
in January 2016, Messrs. Tsirigakis and Syllantavos collectively transferred an aggregate of 165,600 shares to our other initial
shareholders. In August 2016, the Sponsors returned to Stellar, at no cost, an aggregate of 129,839 Founder Shares, which were
cancelled, leaving an aggregate of 2,170,161 Founder Shares outstanding. In connection with the partial over-allotment exercise
in October 2016, certain of the Initial Shareholders forfeited an aggregate of 166,758 shares of common stock.
Dominium
Investments Inc. and Firmus Investments Inc. have purchased an aggregate of 7,970,488 Sponsor Private Placement Warrants for a
purchase price of $0.50 per warrant in private placements that occurred simultaneously with the closings of Stellar’s IPO
(including the over-allotment exercise). Each private placement warrant entitles the holder to purchase one share of our common
stock at $11.50 per share. Warrants may be exercised only for a whole number of shares of common stock. The Sponsor Private Placement
Warrants (including the common stock issuable upon exercise of the Sponsor Private Placement Warrants) may not, subject to certain
limited exceptions, be transferred, assigned or sold by it until 30 days after the completion of our initial business combination.
If
any of Stellar’s officers or directors becomes aware of a business combination opportunity that falls within the line of
business of any entity to which he or she has then current fiduciary or contractual obligations, he or she may be required to
present such business combination opportunity to such entity prior to presenting such business combination opportunity to us.
Stellar’s executive officers and directors currently have certain relevant fiduciary duties or contractual obligations that
may take priority over their duties to Stellar.
Stellar
has entered into an Administrative Services Agreement with Nautilus Energy Management Corp., an affiliate of Stellar’s executive
officers, pursuant to which Stellar pays a total of $10,000 per month for office space, utilities and secretarial support. Upon
completion of its initial business combination or its liquidation, Stellar will cease paying these monthly fees.
The
Sponsors, executive officers and directors, or any of their respective affiliates, are reimbursed for any out-of-pocket expenses
incurred in connection with activities on its behalf such as identifying potential target businesses and performing due diligence
on suitable business combinations. Stellar’s audit committee reviews on a quarterly basis all payments that were made to
the Sponsors, officers, directors or their affiliates and determines which expenses and the amount of expenses that are to be
reimbursed. There is no cap or ceiling on the reimbursement of out-of-pocket expenses incurred by such persons in connection with
activities on Stellar’s behalf.
Three
of the Sponsors, Firmus Investments Inc., Astra Maritime Corp. and Magellan Investments Corp., loaned Stellar up to $100,000,
$75,000 and $75,000, respectively, or up to $250,000 in the aggregate, to be used for a portion of the expenses of its IPO. These
loans were repaid upon the closing of its IPO out of the $725,000 of offering proceeds that was allocated to the payment of offering
expenses.
In
addition, in order to finance transaction costs in connection with an intended initial business combination, The Sponsors or an
affiliate of the Sponsors or certain of its officers and directors may, but are not obligated to, loan funds to Stellar as may
be required. If Stellar completes an initial business combination, it would repay such loaned amounts. In the event that the initial
business combination does not close, Stellar may use a portion of the working capital held outside the Trust Account, including
interest permitted to be withdrawn, to repay such loaned amounts but no other proceeds from Stellar’s Trust Account would
be used for such repayment. Up to $2,000,000 of such loans (including any loans made in connection with the extension of the time
available for us to consummate our initial business combination) may be convertible into warrants of the post-business combination
entity at a price of $0.50 per warrant at the option of the lender. The warrants would be identical to the Private Placement Warrants.
On
each of August 24, 2017, November 24, 2017 and February 23, 2018, we issued unsecured promissory notes in the aggregate amount
of $303,300, $301,000 and $167,100, respectively, to three of our sponsors. The Sponsor notes bear no interest and are repayable
in full upon consummation of Stellar’s initial business combination. The Sponsors have the option to convert any unpaid
balance of the Sponsor Notes into warrants exercisable for shares of our common stock, based on a conversion price of $0.50 per
warrant. The terms of any such warrants shall be identical to the terms of the warrants issued pursuant to the private placement
that was consummated by us in connection with Stellar’s IPO. Additionally, on February 22, 2018, Stellar issued a promissory
note in the aggregate amount of $201,268 to Phunware.
On
each of August 24, 2017 and November 24, 2017, the Sponsors, and on February 23, 2018, the Sponsors and Phunware, deposited cash
into the Trust Account and Stellar also instructed the trust agent to apply interest earned on the funds available for withdrawal
toward the principal held in the Trust Account, representing an aggregate of $402,536, or $0.058 per Public Share. In February
2018, Stellar also issued a note to Phunware with a principal amount of $201,268. Both the Sponsors and Phunware deposited cash
into the Trust Account and also instructed the trust agent to apply interest earned on the funds available for withdrawal toward
the principal held in the Trust Account, representing an aggregate of $402,536, or $0.058 per Public Share. As such, Stellar extended
the period of time to consummate a business combination three times, each for three months, to May 24, 2018.
At
the May 2018 Extension Meeting, Stellar’s shareholders approved (i) an amendment to Stellar’s Second Amended and Restated
Articles of Incorporation, extending the date by which Stellar must consummate its initial business combination from May 24, 2018
to August 24, 2018 or such earlier date as determined by its board of directors; and (ii) the amendment and restatement of that
certain investment management trust agreement, dated as of August 18, 2016, by and between Stellar and Continental Stock Transfer
and Trust Company (“Continental”), to extend the date on which Continental must liquidate the Trust Account if Stellar
has not completed an initial business combination, from May 24, 2018 to August 24, 2018, and to permit the withdrawal of funds
from the Trust Account to pay shareholders who properly exercise their redemption rights in connection with such amendment. Shareholders
holding 3,353,060 Public Shares exercised their right to redeem such Public Shares into a pro rata portion of the Trust Account.
As a result, an aggregate of approximately $34,787,998 (or approximately $10.375 per share) were removed from the Trust Account
to pay such holders.
In
addition, the Sponsors agreed to contribute to Stellar as a loan $0.035 for each Public Share that was not redeemed, for each
calendar month (commencing on May 24, 2018 and on the 24th day of each subsequent month), or portion thereof, that is needed by
Stellar to complete a business combination from May 24, 2018 until August 24, 2018, to be deposited in the Trust Account. Accordingly,
the Sponsors will contribute an aggregate of approximately $124,164 to Stellar by the 24th day of each such calendar month (or
portion thereof), with the initial contribution been on May 24, 2018. Since Stellar took the full time through August 24, 2018
to complete the initial business combination, the redemption amount per share at the meeting for such business combination or
Stellar’s subsequent liquidation was approximately $10.48 per share. The amount of the contribution did not bear interest
and will be repayable by Stellar to the Sponsors upon consummation of an initial business combination.
At
the August 2018 extension meeting, Stellar’s shareholders approved (i) an amendment to Stellar’s second amended and
restated articles of incorporation, extending the date by which Stellar must consummate its initial business combination from
August 24, 2018 to December 26, 2018 or such earlier date as determined by Stellar’s board of directors, and (ii) the amendment
and restatement of that certain amended and restated investment management trust agreement, dated as of May 23, 2018, by and between
Stellar and Continental, to extend the date on which Continental must liquidate the Trust Account to permit the withdrawal of
funds from the Trust Account to pay shareholders who properly exercise their redemption rights in connection with such extension.
Shareholders holding 1,695,830 Public Shares exercised their right to redeem such Public Shares into a pro rata portion of the
Trust Account. As a result, an aggregate of approximately $17,772,299 (or approximately $10.48 per share) were removed from the
Trust Account to pay such holders.
In
connection with the August 2018 extension meeting, the Sponsors agreed to contribute to Stellar as a loan $0.04 for each Public
Share that was not redeemed, for each calendar month (commencing on August 24, 2018 and on the 24
th
day of each subsequent
month), or portion thereof, that is needed by Stellar to complete a business combination from August 24, 2018 until December 26,
2018, to be deposited in the Trust Account. Accordingly, the Sponsors will contribute an aggregate of approximately $158,452 to
Stellar within five calendar days from the beginning of each such calendar month (or portion thereof), with the initial contribution
contributed by August 29, 2018. If Stellar takes the full time through December 26, 2018 to complete the initial business combination,
the redemption amount per share at the meeting for such business combination or Stellar’s subsequent liquidation will be
approximately $10.64 per share. The amount of the August contribution will not bear interest and will be repayable by Stellar
to the Sponsors upon consummation of an initial business combination.
After
Stellar’s initial business combination, members of its management team who remain with us may be paid consulting, management
or other fees from the combined company with any and all amounts being fully disclosed to our shareholders, to the extent then
known, in the tender offer or proxy solicitation materials, as applicable, furnished to our shareholders. It is unlikely the amount
of such compensation will be known at the time of distribution of such tender offer materials or at the time of a shareholder
meeting held to consider our initial business combination, as applicable, as it will be up to the directors of the post-combination
business to determine executive and director compensation.
Stellar
has entered into a registration rights agreement, dated August 18, 2016, with respect to the Founder Shares and Sponsor Private
Placement Warrants (the “Stellar Registration Rights Agreement”). The holders of the Founder Shares and Sponsor Private
Placement Warrants have registration rights to require us to register a sale of any of our securities held by them. These holders
will be entitled to make up to three demands, excluding short form registration demands, that Stellar register such securities
for sale under the Securities Act. In addition, these holders will have “piggy-back” registration rights to include
such securities in other registration statements filed by Stellar and rights to require us to register for resale such securities
pursuant to Rule 415 under the Securities Act. The Company will bear the costs and expenses of filing any such registration statements.
Stellar’s
audit committee must review and approve any related person transaction it proposes to enter into. Its audit committee charter
details the policies and procedures relating to transactions that may present actual, potential or perceived conflicts of interest
and may raise questions as to whether such transactions are consistent with the best interest of Stellar and its shareholders.
A summary of such policies and procedures is set forth below.
Any
potential related party transaction that is brought to the audit committee’s attention will be analyzed by the audit committee,
in consultation with outside counsel or members of management, as appropriate, to determine whether the transaction or relationship
does, in fact, constitute a related party transaction. At its meetings, the audit committee will be provided with the details
of each new, existing or proposed related party transaction, including the terms of the transaction, the business purpose of the
transaction and the benefits to us and to the relevant related party.
In
determining whether to approve a related party transaction, the audit committee must consider, among other factors, the following
factors to the extent relevant:
|
●
|
whether the terms of
the transaction are fair to us and on the same basis as would apply if the transaction did not involve a related party;
|
|
●
|
whether there are business
reasons for us to enter into the transaction;
|
|
●
|
whether the transaction
would impair the independence of an outside director; and
|
|
●
|
whether the transaction
would present an improper conflict of interest for any director or executive officer.
|
Any
member of the audit committee who has an interest in the transaction under discussion must abstain from any voting regarding the
transaction, but may, if so requested by the chairman of the audit committee, participate in some or all of the audit committee’s
discussions of the transaction. Upon completion of its review of the transaction, the audit committee may determine to permit
or to prohibit the transaction.
Our
Existing Policies and Procedures for Related Person Transactions
We
adopted a formal written policy effective upon the consummation of the Business Combination providing that our executive officers,
directors, nominees for election as directors, beneficial owners of more than 5% of any class of our capital stock, any member
of the immediate family of any of the foregoing persons and any firm, corporation or other entity in which any of the foregoing
persons is employed or is a general partner or principal or in a similar position or in which such person has a 5% or greater
beneficial ownership interest, are not permitted to enter into a related party transaction with us without the approval of our
nominating and corporate governance committee, subject to the exceptions described below.
A
related person transaction is a transaction, arrangement or relationship, or any series of similar transactions, arrangements
or relationships, in which we and any related person are, were or will be participants in which the amount involves exceeds $120,000.
Transactions involving compensation for services provided to the Successor as an employee or director are not covered by this
policy.
Under
the policy, we will collect information that we deem reasonably necessary from each director, executive officer and, to the extent
feasible, significant stockholder to enable us to identify any existing or potential related-person transactions and to effectuate
the terms of the policy. In addition, under our Code of Conduct, our employees and directors have an affirmative responsibility
to disclose any transaction or relationship that reasonably could be expected to give rise to a conflict of interest. In considering
related person transactions, the Successor’s nominating and corporate governance committee, or other independent body of
our board of directors, will take into account the relevant available facts and circumstances including, but not limited to:
|
●
|
the risks, costs and
benefits to us;
|
|
●
|
the impact on a director’s
independence in the event that the related person is a director, immediate family member of a director or an entity with which
a director is affiliated;
|
|
●
|
the availability of
other sources for comparable services or products; and
|
|
●
|
the terms available
to or from, as the case may be, unrelated third parties or to or from employees generally.
|
The
policy requires that, in determining whether to approve, ratify or reject a related person transaction, our nominating and corporate
governance committee, or other independent body of our board of directors, must consider, in light of known circumstances, whether
the transaction is in, or is not inconsistent with, our best interests and those of our stockholders, as our nominating and corporate
governance committee, or other independent body of our board of directors, determines in the good faith exercise of its discretion.
Our
nominating and corporate governance committee has determined that certain transactions will not require the approval of the nominating
and corporate governance committee, including certain employment arrangements of executive officers, director compensation, transactions
with another company at which a related party’s only relationship is as a director, non-executive employee or beneficial
owner of less than 10% of that company’s outstanding capital stock, transactions where a related party’s interest
arises solely from the ownership of our common stock and all holders of our common stock received the same benefit on a pro rata
basis and transactions available to all employees generally.
PRINCIPAL
AND SELLING SECURITYHOLDERS
The
following table sets forth information regarding beneficial ownership of our common stock as of December 26, 2018, as adjusted
to reflect the Securities that may be sold from time to time pursuant to this prospectus, for:
|
●
|
each
person or group of affiliated persons known by us to be the beneficial owner of more
than 5% of our common stock;
|
|
●
|
each
of our named executive officers;
|
|
●
|
all
executive officers and directors as a group; and
|
|
●
|
all
selling stockholders, consisting of the entities and individuals shown as having shares
listed in the column “Securities Being Offered.”
|
The
shares of common stock and warrants offered hereunder include:
|
●
|
an aggregate of 2,354,191 outstanding shares of our common stock (i) initially issued to the Sponsors
and (ii) held by certain stockholders of the Company issued upon the exercise of certain Series F Warrants, offered pursuant to
this prospectus;
|
|
●
|
542,608
shares of our common stock issued upon conversion of our 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 our common stock issuable upon exercise of the Public Warrants that were issued
by Stellar in its initial public offering, currently exercisable for one share of our
common stock at a price of $11.50 per share;
|
|
●
|
14,866
shares of our common stock issuable upon exercise of the Series D-1 Warrants issued to
a stockholder of the Company, currently exercisable for one share of our 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);
|
|
●
|
734,309
shares of our common stock issuable upon exercise of the Series F Warrants issued to certain Company stockholders, currently exercisable
for one share of our 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 holders of Series F Warrants pursuant to this prospectus);
|
|
●
|
10,182,078
shares of our common stock issuable upon exercise of the Sponsor 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, currently exercisable
for one share of our 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);
|
|
●
|
10,182,078
warrants to purchase shares of our 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 and repayment of Sponsor related
party notes for extension costs, currently exercisable for one share of our common stock
at a price of $11.50 per share, offered by the selling securityholders pursuant to this
prospectus;
|
|
●
|
260,000 shares of our common stock issuable upon exercise of the UPOs that were issued to the underwriters
in connection with Stellar’s initial public offering and the warrants underlying such UPOs, currently exercisable for one
share of our common stock and one warrant exercisable for one share of our 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 (upon
exercise and issuance, such shares of common stock may be offered for sale by the holders pursuant to this prospectus); and
|
|
●
|
130,000
warrants to purchase shares of our common stock that are the UPO Warrants, currently exercisable for one share of our common stock
at a price of $11.50 per share, offered by the selling securityholders pursuant to this
prospectus.
|
Note
that the 6,900,610 shares of our common stock issuable upon exercise of the Public Warrants are not included in the following
table.
We
have determined beneficial ownership in accordance with the rules of the SEC and the information is not necessarily indicative
of beneficial ownership for any other purpose. Unless otherwise indicated below, to our knowledge, the persons and entities named
in the table have sole voting and sole investment power with respect to all shares that they beneficially own, subject to community
property laws where applicable. In computing the number of shares of our common stock beneficially owned by a person and the percentage
ownership of that person, we deemed outstanding shares of our common stock subject to options or restricted stock units held by
that person that are currently exercisable or exercisable within 60 days of December 26, 2018. We did not deem these shares outstanding,
however, for the purpose of computing the percentage ownership of any other person.
We
have based percentage ownership of our common stock prior to this offering on 27,294,164 shares of our common stock outstanding
as of December 26, 2018 unless otherwise noted.
Unless
otherwise indicated, the address of each beneficial owner listed on the table below is c/o Phunware, Inc., 7800 Shoal Creek Blvd,
Suite 230-S, Austin, TX 78757.
|
|
Shares Beneficially Owned Prior to the Offering
(1)
|
|
|
Shares Being Offered
|
|
|
Warrants Being Offered
|
|
|
Shares Beneficially Owned After the Offering
|
|
|
|
Shares
|
|
|
Percentage
|
|
|
Shares
|
|
|
Warrants
|
|
|
Shares
|
|
|
Percentage
|
|
Name of Beneficial Owner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% Securityholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mount Raya Investments Limited
(2)
|
|
|
2,205,886
|
|
|
|
8.1
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
2,205,886
|
|
|
|
8.7
|
%
|
Fraser McCombs Ventures LP
(5)
|
|
|
1,789,924
|
|
|
|
6.5
|
%
|
|
|
239,697
|
|
|
|
—
|
|
|
|
1,550,227
|
|
|
|
6.1
|
%
|
First American Trust of Nevada, LLC
(6)
|
|
|
1,771,713
|
|
|
|
6.4
|
%
|
|
|
199,989
|
|
|
|
—
|
|
|
|
1,571,724
|
|
|
|
6.2
|
%
|
Max Fang
(5)
|
|
|
2,189,803
|
|
|
|
8.0
|
%
|
|
|
24,321
|
|
|
|
—
|
|
|
|
2,165,482
|
|
|
|
8.7
|
%
|
Firmus Investments
(4)
|
|
|
1,888,442
|
|
|
|
6.9
|
%
|
|
|
1,888,442
|
|
|
|
1,695,124
|
|
|
|
—
|
|
|
|
*
|
|
Astra Maritime Corp.
(7)
|
|
|
1,642,493
|
|
|
|
6.0
|
%
|
|
|
1,642,493
|
|
|
|
1,464,724
|
|
|
|
—
|
|
|
|
*
|
|
Firsthand Venture Investors
(8)
|
|
|
1,495,113
|
|
|
|
5.5
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
1,495,113
|
|
|
|
5.9
|
%
|
Magellan Investments Corp.
(4)
|
|
|
1,487,898
|
|
|
|
5.5
|
%
|
|
|
1,487,898
|
|
|
|
1,301,724
|
|
|
|
—
|
|
|
|
*
|
|
Dominium Investments Inc.
(7)
|
|
|
1,460,128
|
|
|
|
5.4
|
%
|
|
|
1,460,128
|
|
|
|
1,250,000
|
|
|
|
—
|
|
|
|
*
|
|
Named Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alan Knitowski
(9)
|
|
|
998,186
|
|
|
|
3.6
|
%
|
|
|
234,913
|
|
|
|
—
|
|
|
|
763,273
|
|
|
|
3.0
|
%
|
Luan Dang
(10)
|
|
|
961,367
|
|
|
|
3.5
|
%
|
|
|
105,688
|
|
|
|
—
|
|
|
|
855,659
|
|
|
|
3.4
|
%
|
Scott Kenyon
(11)
|
|
|
182,642
|
|
|
|
*
|
|
|
|
21,280
|
|
|
|
—
|
|
|
|
161,362
|
|
|
|
*
|
|
Prokopios (Akis) Tsirigakis
(12)(13)
|
|
|
3,102,621
|
|
|
|
10.3
|
%
|
|
|
3,102,621
|
|
|
|
2,714,724
|
|
|
|
—
|
|
|
|
*
|
|
Keith Cowan
(13)
|
|
|
—
|
|
|
|
*
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
*
|
|
|
|
Shares Beneficially Owned Prior to the Offering
(1)
|
|
|
Shares Being Offered
|
|
|
Warrants Being Offered
|
|
|
Shares Beneficially Owned After the Offering
|
|
|
|
Shares
|
|
|
Percentage
|
|
|
Shares
|
|
|
Warrants
|
|
|
Shares
|
|
|
Percentage
|
|
Randall Crowder
(14)
|
|
|
988,642
|
|
|
|
3.5
|
%
|
|
|
472,160
|
|
|
|
—
|
|
|
|
516,482
|
|
|
|
2.0
|
%
|
Lori Tauber Marcus
(13)
|
|
|
—
|
|
|
|
*
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
*
|
|
Kathy Tan Mayor
(13)
|
|
|
—
|
|
|
|
*
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
*
|
|
George Syllantavos
(13)(15)
|
|
|
3,376,340
|
|
|
|
11.1
|
%
|
|
|
3,376,340
|
|
|
|
2,996,848
|
|
|
|
—
|
|
|
|
*
|
|
All executive officers and directors as a group (10 persons)
(16)
|
|
|
9,763,768
|
|
|
|
33.0
|
%
|
|
|
7,472,836
|
|
|
|
5,861,572
|
|
|
|
2,312,212
|
|
|
|
9.1
|
%
|
Other Selling Securityholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dominion
Capital LLC
(17)
|
|
|
1,042,608
|
|
|
|
3.7
|
%
|
|
|
1,042,608
|
|
|
|
250,000
|
|
|
|
—
|
|
|
|
*
|
|
Hudson Bay Capital Management LP
(18)
|
|
|
511,400
|
|
|
|
1.8
|
%
|
|
|
511,400
|
|
|
|
511,400
|
|
|
|
—
|
|
|
|
*
|
|
Securityholders
that each hold less than 1% of our outstanding shares of common stock
(19)
|
|
|
5,990,804
|
|
|
|
20.7
|
%
|
|
|
5,990,804
|
|
|
|
4,089,106
|
|
|
|
—
|
|
|
|
*
|
|
(*)
|
Represents beneficial
ownership of less than 1%.
|
(1)
|
The percentage of
beneficial ownership on the record date is calculated based on 27,294,164 shares of our common stock as of December 26, 2018, adjusted for each owner’s options or restricted stock units held by that person that are currently
exercisable or exercisable within 60 days of December 26, 2018, if any.
Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect
to all ordinary shares beneficially owned by them.
|
(2)
|
Includes 2,205,886 shares held of record by Mount Raya Investments
Limited, an entity wholly-controlled by Khazanah Nasional Berhad, a strategic investment fund of the Government of Malaysia.
The address for this entity is c/o Khazanah Americas Incorporated, 101 California Street, Suite 4550, San Francisco, California
94111
.
|
(3)
|
Includes (i) 857,508 shares held of record by Maxima Ventures II, Inc., of which Mr. Fang
serves as General Manager, (ii) 599,425 shares held of record by Maxima Ventures Services II, Inc., of which Mr. Fang serves
as a director, (iii) 399,616 shares held of record by TC-1 Culture Fund, of which Mr. Fang serves as General Manager, (iv)
158,434 shares and 24,321 Sponsor Private Placement Warrants exercisable within 60 days of December 26, 2018 held of record
by Eagle China Holdings Limited, and (v) 151,641 shares held of record by Maxima Ventures Services IV, Inc., of which Mr.
Fang serves as a director. The address for these entities is No. 16, Lane 66, Sec. 4, Heping East Road, Wenshan Dist., Taipei
City 116, Taipei City, Taiwan.
|
(4)
|
Mr. Syllantavos is the sole shareholder of Firmus Investments Inc. and Magellan Investments
Corp. As a result, Mr. Syllantavos may be deemed to be beneficial owner of any shares deemed to be beneficially owned by Firmus
Investments Inc. and Magellan Investments Inc.
|
(5)
|
Includes (i) 1,550,227 shares and (ii) 239,697 Sponsor Private
Placement Warrants exercisable within 60 days of December 26, 2018 held of record by Fraser McCombs Ventures LP (“FMV
LP”). Chase Frazier, a former director of Phunware, serves as the Managing Member of Frazier McCombs Capital Management
LLC, the general partner of FMV LP. The address for these entities is 1035 Pearl Street, Suite 401, Boulder, Colorado 80302
.
|
(6)
|
Includes (i) 1,571,724
shares and (ii) 299,989 Sponsor Private Placement Warrants exercisable within 60 days of December 26, 2018 held of record
by First American Trust of Nevada, LLC, as Trustee of the Poiema Trust No. 2 dated November 28, 2018. The address for these
entities is 3753 Howard Hughes Pkwy, Ste. 200 Las Vegas, NV 89169.
|
(7)
|
Mr. Tsirigakis is the sole shareholder of Astra Maritime Corp. and
Dominium Investments Inc. As a result, Mr. Tsirigakis may be deemed to be beneficial owner
of any shares deemed to be beneficially owned by Astra Maritime Corp. and Dominium Investments
Inc.
|
(8)
|
Includes 1,495,113
shares held of record Firsthand Ventures Investors, a fully owned and controlled subsidiary of Firsthand Technology Value
Fund, Inc. The address for these entities is 150 Almaden Boulevard, Suite 1250, San Jose, California 95113.
|
(9)
|
Includes (i) 338,946
shares and 211,604 Series F Warrants and Sponsor Private Placement Warrants exercisable within 60 days of December 26, 2018
held of record by Cane Capital, LLC, for which Mr. Knitowski serves as president, (ii) 2,636 shares and 1,624 Sponsor Private
Placement Warrants exercisable within 60 days of December 26, 2018 held of record by Curo Capital Appreciation Fund I, LLC
(#1), for which Mr. Knitowski serves as president, (iii) 2,636 shares and 4,336 Series F Warrants and Sponsor Private Placement
Warrants exercisable with 60 days of December 26, 2018 held of record by Curo Capital Appreciation Fund I, LLC (Fund 1), for
which Mr. Knitowski serves as president, (iv) 10,545 shares and 17,349 Series F Warrants and Sponsor Private Placement Warrants
exercisable within 60 days of December 26, 2018 held of record by Curo Capital Appreciation Fund I, LLC (Fund 2), for which
Mr. Knitowski serves as president, and (v) 408,510 shares subject to options exercisable within 60 days of December 26, 2018,
of which 255,510 had vested as of such date.
|
(10)
|
Includes (i) 683,534
shares held of record by Mr. Dang, (ii) 105,688 Sponsor Private Placement Warrants exercisable within 60 days of December
26, 2018 and (iii) 172,125 shares subject to options exercisable within 60 days of December 26, 2018, of which 82,476 had
vested as of such date.
|
(11)
|
Includes (i) 161,362
shares held of record by Mr. Kenyon and (ii) 21,280 Sponsor Private Placement Warrants exercisable within 60 days of December
26, 2018. Mr. Kenyon resigned from his position as an executive officer of Phunware effective February 2, 2018.
|
(12)
|
Includes (i) 177,769
shares held of record by Astra Maritime Corp., for which Mr. Tsirigakis is the sole shareholder, (ii) 210,128 shares held
of record by Dominium Investments, Inc., for which Mr. Tsirigakis is the sole shareholder, and (iii) 2,714,724 Sponsor Private
Placement Warrants exercisable within 60 days of December 26, 2018 held of record by Dominium Investments, Inc. and Astra
Maritime Corp.
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(13)
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Messrs. Cowan, Syllantavos
and Tsirigakis and Mses. Marcus and Mayor each joined our board of directors upon consummation of the business combination
on December 26, 2018.
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(14)
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Includes (i) 286,982
shares held of record by Mr. Crowder, (ii) 176,867 Sponsor Private Placement Warrants and 295,293 Series F Warrants exercisable
within 60 days of December 26, 2018 held of record by Nove PW I LP, of which Mr. Crowder is founder and managing partner;
and (iii) 229,500 shares subject to option exercisable within 60 days of December 26, 2018, of which none had vested as of
such date.
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(15)
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Includes (i) 186,174
shares held of record by Magellan Investments Corp., of which Mr. Syllantavos is the sole shareholder, (ii) 193,318 shares held
of record by Firmus Investments, Inc., of which Mr. Syllantavos is the sole shareholder, and (iii) 2,996,848 Sponsor Private Placement
Warrants exercisable within 60 days of December 26, 2018 held of record by Magellan Investments Corp. and Firmus Investments,Inc.
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(16)
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Includes (i) 2,104,226
shares held of record by our current directors and executive officers, 6,369,888 Sponsor Private Placement Warrants and 314,279
Series F Warrants exercisable within 60 days of December 26, 2018 and (iii) 975,375 shares subject to options exercisable
within 60 days of December 26, 2018.
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(17)
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Includes (i) 542,608 shares held of record by Dominion Capital LLC upon the conversion of shares of Series
A preferred stock (ii) 250,000 shares held of record by Dominion Capital LLC and (iii) 250,000 Sponsor Private Placement Warrants
exercisable within 60 days of December 26, 2018. Mikhail Gurevich is the Managing Member of Dominion Capital LLC and exercises
sole voting and investment power on behalf thereof.
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(18)
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According to a Schedule 13G/A filed with the SEC on January 4, 2019 on behalf of Hudson Bay
Capital Management LP., a Delaware limited partnership, such entity is the beneficial owner of and has sole voting and dispositive
power with respect to the these securities. Mr. Sander Gerber serves as the managing member of Hudson Bay Capital GP LLC,
which is the general partner of Hudson Bay Capital Management LP. Mr. Gerber disclaims beneficial ownership of these securities.
The address of such entity is 777 Third Avenue, 30
th
Floor, New York, NY 10017
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(19)
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Represents shares
of
our common stock held of record, shares issuable upon the exercise of warrants exercisable within 60 days of December
26, 2018 and warrants to purchase shares of our common stock held of record by 75
selling
securityholders not listed above.
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DESCRIPTION
OF SECURITIES
GENERAL
The
following is a summary of the rights of our securities and certain provisions of our amended and restated certificate of incorporation
and amended and restated bylaws. This summary does not purport to be complete and is qualified in its entirety by the provisions
of our amended and restated certificate of incorporation and amended and restated bylaws, copies of which have been filed as exhibits
to the registration statement of which this prospectus is a part.
We
are a Delaware corporation. Our authorized capital stock consists of 1,000,000,000 shares of common stock, par value $0.0001 per
share, and 100,000,000 shares of preferred stock, par value $0.0001 per share.
COMMON
STOCK
Dividend
Rights
Subject
to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of our common stock are entitled
to receive dividends out of funds legally available if our board of directors, in its discretion, determines to issue dividends
and then only at the times and in the amounts that our board of directors may determine. 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.
Voting
Rights
Holders
of shares of our common stock shall be entitled to cast one vote for each share held on all matters submitted to a vote of our
stockholders. Holders of shares of our common stock have no cumulative voting rights with respect to the election of directors.
Our amended and restated certificate of incorporation establishes a classified board of directors that is divided into three classes
with staggered three-year terms. Only the directors in one class will be subject to election by a plurality of votes cast at each
annual meeting of our stockholders, with the directors in the other classes continuing for the remainder of their respective three-year
terms.
No
Preemptive or Similar Rights
Our
common stock is not entitled to preemptive rights and is not subject to conversion, redemption or sinking fund provisions. 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.
Right
to Receive Liquidation Distributions
If
we become subject to a liquidation, dissolution, or winding-up, the assets legally available for distribution to our stockholders
would be distributable ratably among the holders of our common stock and any participating preferred stock outstanding at that
time, subject to prior satisfaction of all outstanding debt and liabilities and the preferential rights and payment of liquidation
preferences, if any, on any outstanding shares of preferred stock.
Other
Immediately
prior to the consummation of the Business Combination, the Sponsors owned 2,003,403 shares of Stellar common stock. We refer to
the Sponsors that owned any of the Stellar common stock as Stellar’s “initial shareholders,” and the 2,003,403
shares of Stellar common stock that they owned in aggregate are referred to as the “founder shares.” The founder shares
were identical to the Stellar shares included in the units sold in Stellar’s initial public offering and on the effective
date of the domestication, each issued and outstanding founder share of Stellar automatically converted by operation of law, on
a one-for-one basis, into one share of our common stock immediately after consummation of the Business Combination.
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 (each, a “Significant Stockholder”) became 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 one hundred and eighty days (180) 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 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.
At the consummation of the Business Combination, each of the Sponsors entered into a substantially similar lock-up agreement with
Stellar.
PREFERRED
STOCK
6,000
shares of our Series A 8% convertible preferred stock are currently issued and outstanding. Such Series A shares are convertible into 542,608 shares of our common stock being registered pursuant
to this prospectus. Pursuant to our amended and restated
certificate of incorporation, our board of directors has the authority, without further action by our stockholders, to issue from
time to time shares of preferred stock in one or more series. Our board of directors may designate the rights, preferences, privileges
and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, redemption rights, liquidation
preference, sinking fund terms and the number of shares constituting any series or the designation of any series. The issuance
of preferred stock could have the effect of restricting dividends on our common stock, diluting the voting power of our common
stock, impairing the liquidation rights of our common stock, or delaying, deterring or preventing a change in control. Such issuance
could have the effect of decreasing the market price of our common stock.
WARRANTS
As of the date of this
prospectus, there are outstanding an aggregate of 17,990,396 warrants to acquire our common stock, including (i) 10,182,078 Sponsor
Private Placement Warrants issued to the Sponsors, (ii) 6,900,610 Public Warrants, (iii) 14,866 Series D-1 Warrants held by certain
of our stockholders, (iv) 762,842 Series F Warrants held by certain of our stockholders and (v) 130,000 UPO Warrants issuable to
the underwriters in connection with Stellar’s initial public offering upon exercise of the UPOs. Each of the units issued
in Stellar’s initial public offering contained one-half of a warrant. Each warrant entitles the holder thereof to purchase
one share of our common stock. The Sponsor Private Placement Warrants, the Public Warrants and the UPO Warrants are each exercisable
for one share of our common stock at $11.50 per share. The Series D-1 Warrants are each exercisable for one share of our common
stock at $5.53 per share and the Series F Warrants are each exercisable for one share of our common stock at $9.22 per share.
Public Warrants
Each Public Warrant entitles the
registered holder to purchase one share of common stock at a price of $11.50 per full share, subject to adjustment as
discussed below, at any time commencing upon the completion of a business combination. Pursuant to the Stellar Warrant
Agreement (as defined below), a warrant holder may exercise its warrants only for a whole number of shares. This means that
only an even number of warrants may be exercised at any given time by a warrant holder. However, except as set forth below,
no Public Warrants will be exercisable for cash without an effective and current registration statement covering the shares
of common stock issuable upon exercise of the Public Warrants and a current prospectus relating to such shares of common
stock. Notwithstanding the foregoing, if a registration statement covering the shares of common stock issuable upon exercise
of the Public Warrants is not effective within 90 days from the consummation the Business Combination, warrant holders may,
until such time as there is an effective registration statement and during any period when we have failed to maintain an
effective registration statement, exercise warrants on a cashless basis pursuant to an available exemption from registration
under the Securities Act. If an exemption from registration is not available, holders will not be able to exercise their
warrants on a cashless basis. 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. The warrants will expire
five years from the consummation of the Business Combination at 5:00 p.m., New York City time.
We may call the Public Warrants for redemption,
in whole and not in part, at a price of $0.01 per warrant,
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·
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at any time while the warrants are exercisable,
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·
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upon not less than 30 days’ prior written notice of redemption to each warrant holder,
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·
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if and only if, the reported last sale price of the shares of common stock equals or exceeds $21.00 per share, for any 20 trading
days within a 30-day trading-period ending on the third business day prior to the notice of redemption to warrant holders, and
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·
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if and only if, there is a current registration statement in effect with respect to the common stock underlying such warrants
at the redemption date and for the entire 30-day trading period referred to above and continuing each day thereafter until the
date of redemption.
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The right to exercise will be forfeited unless
the Public Warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a
record holder of a Public Warrant will have no further rights except to receive the redemption price for such holder’s Public
Warrant upon surrender of such Public Warrant.
The redemption criteria for the Public Warrants
have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price
and provide a sufficient differential between the then-prevailing share price and the warrant exercise price so that if the share
price declines as a result of the redemption call, the redemption will not cause the share price to drop below the exercise price
of the Public Warrants.
If we call the Public Warrants for redemption
as described above, our management will have the option to require all holders that wish to exercise Public Warrants to do so on
a “cashless basis.” In such event, each holder would pay the exercise price by surrendering the Public 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 Public 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 Public Warrants. Whether we will exercise its option to require all holders to exercise
their Public Warrants on a “cashless basis” will depend on a variety of factors including the price of the common stock
at the time the Public Warrants are called for redemption, our cash needs at such time and concerns regarding dilutive share issuances.
The Public Warrants are issued in registered
form under the Stellar Warrant Agreement between Continental Stock Transfer & Trust Company, as warrant agent, and Phunware.
The Stellar Warrant Agreement provides that the terms of the Public Warrants may be amended without the consent of any holder to
cure any ambiguity or correct any defective provision, but requires the approval, by written consent or vote, of the holders of
a majority of the then outstanding Public Warrants and Sponsor Private Placement Warrants in order to make any change that adversely
affects the interests of the registered holders.
The exercise price and number of shares of
common stock issuable on exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a share
dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation. However, the Public Warrants
will not be adjusted for issuances of common stock at a price below their respective exercise prices. We are also permitted, in
our sole discretion, to lower the exercise price (but not below the par value of a share of common stock) at any time prior to
the expiration date for a period of not less than 10 business days; provided, however, that we provide at least 10 business days
prior written notice of such reduction to registered holders of the Public Warrants and that any such reduction will be applied
consistently to all of the Public Warrants. Any such reduction in the exercise price will comply with any applicable regulations
under the Federal securities laws, including Rule 13e-4 under the Exchange Act generally and Rule 13e-4(f)(1)(i) specifically.
The Public Warrants may be exercised upon
surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise
form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise
price, by certified or official bank check payable to Phunware, for the number of Public Warrants being exercised. The Public Warrants
holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their Public
Warrants and receive common stock. After the issuance of common stock upon exercise of the Public Warrants, each holder will be
entitled to one vote for each share held of record on all matters to be voted on by shareholders.
Except as described above, no Public Warrants
will be exercisable and we will not be obligated to issue common stock unless at the time a holder seeks to exercise such Public
Warrants, a prospectus relating to the common stock issuable upon exercise of the Public Warrants is current and the common stock
has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the
Public Warrants. The Stellar Warrant Agreement is discussed in more detail below.
No fractional shares will be issued upon
exercise of the Public Warrants. If, upon exercise of the Public Warrants, a holder would be entitled to receive a fractional interest
in a share (as a result of a subsequent share dividend payable in shares of common stock, or by a split up of the common stock
or other similar event), we will, upon exercise, round up or down to the nearest whole number the number of shares of common stock
to be issued to the Public Warrants holder.
Sponsor
Private Placement Warrants
Simultaneously
with the closing of Stellar’s initial public offering, Stellar consummated the sale of 7,970,488 Sponsor Private Placement
Warrants exercisable to purchase one share of Stellar Common Stock at $11.50 per share, at a price of $0.50 per warrant in a private
placement to the Sponsors. The Sponsor Private Placement Warrants are non-redeemable so long as they are held by their initial
purchasers or their permitted transferees. If the Sponsor Private Placement Warrants are held by holders other than their initial
purchasers or their permitted transferees, they will be redeemable by us and exercisable by the holders.
The Sponsor Private Placement Warrants are
identical to the Public Warrants except that the Sponsor Private Placement Warrants (including the common stock issuable upon exercise
of the Sponsor Private Placement Warrants) are not transferable, assignable or salable until 30 days after the consummation of
the Business Combination.
The Sponsor Private Placement Warrants are
issued in registered form under the Stellar Warrant Agreement between Continental Stock Transfer & Trust Company, as warrant
agent, and Phunware. The Stellar Warrant Agreement provides that the terms of the Sponsor Private Placement Warrants may be amended
without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval, by written
consent or vote, of the holders of a majority of the then outstanding Public Warrants and Sponsor Private Placement Warrants in
order to make any change that adversely affects the interests of the registered holders.
The
Sponsor Private Placement Warrants (including the shares of common stock issuable upon exercise of the Sponsor Private Placement
Warrants) were placed into an escrow account with Continental and, while in escrow, were not transferable, assignable or saleable
(except, among other limited exceptions as described above, to Stellar’s officers and directors and other persons or entities
affiliated with the initial purchasers of the Sponsor Private Placement Warrants) and they were not redeemable by us so long as
they were held by the initial purchasers or their permitted transferees. These warrants were released from escrow on
January 25, 2019, 30 days after the completion of the business combination. If a holder of Sponsor Private Placement Warrants
elects to exercise them on a cashless basis, it would pay the exercise price by surrendering its warrants for that number of shares
of our common stock equal to the quotient obtained by dividing (x) the product of the number of shares of our common stock underlying
the warrants, multiplied by the difference between the exercise price of the 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 our common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of warrant exercise
is sent to the warrant agent.
The exercise price and number of shares of
common stock issuable on exercise of the Sponsor Private Placement Warrants may be adjusted in certain circumstances including
in the event of a share dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation. However,
the Sponsor Private Placement Warrants will not be adjusted for issuances of common stock at a price below their respective exercise
prices. We are also permitted, in our sole discretion, to lower the exercise price (but not below the par value of a share of common
stock) at any time prior to the expiration date for a period of not less than 10 business days; provided, however, that we provide
at least 10 business days prior written notice of such reduction to registered holders of the Sponsor Private Placement Warrants
and that any such reduction will be applied consistently to all of the Sponsor Private Placement Warrants. Any such reduction in
the exercise price will comply with any applicable regulations under the Federal securities laws, including Rule 13e-4 under the
Exchange Act generally and Rule 13e-4(f)(1)(i) specifically.
The Sponsor Private Placement Warrants may
be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent,
with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full
payment of the exercise price, by certified or official bank check payable to Phunware, for the number of Sponsor Private Placement
Warrants being exercised. The Sponsor Private Placement Warrants holders do not have the rights or privileges of holders of common
stock and any voting rights until they exercise their Sponsor Private Placement Warrants and receive common stock. After the issuance
of common stock upon exercise of the Sponsor Private Placement Warrants, each holder will be entitled to one vote for each share
held of record on all matters to be voted on by shareholders.
Except as described above, no Sponsor Private
Placement Warrants will be exercisable and we will not be obligated to issue common stock unless at the time a holder seeks to
exercise such Sponsor Private Placement Warrants, a prospectus relating to the common stock issuable upon exercise of the Sponsor
Private Placement Warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities
laws of the state of residence of the holder of the Sponsor Private Placement Warrants. The Stellar Warrant Agreement is discussed
in more detail below.
No fractional shares will be issued upon
exercise of the Sponsor Private Placement Warrants. If, upon exercise of the Sponsor Private Placement Warrants, a holder would
be entitled to receive a fractional interest in a share (as a result of a subsequent share dividend payable in shares of common
stock, or by a split up of the common stock or other similar event), we will, upon exercise, round up or down to the nearest whole
number the number of shares of common stock to be issued to the Sponsor Private Placement Warrants holder.
Preferred
Stock Warrants
Following the consummation of the Business
Combination, there are outstanding warrants to acquire 14,866 shares of our common stock pursuant to the Series D-1 Warrants and
734,309 shares of our common stock pursuant to the Series F Warrants.
The
Series D-1 Warrants are each exercisable for one share of common stock at $5.53 per share and the Series F Warrants are each exercisable
for one share of common stock at $9.22 per share.
For securities law purposes, PhunCoin is deemed
to have already been sold to the holders of the Series F Warrants. This means that, if and when issued, such PhunCoin will be
restricted as to transfer and that any resale by such holders must be made pursuant to an exemption from registration or pursuant
to an effective resale registration statement. We intend for PhunCoin Sub to be the actual issuer of PhunCoin. Before PhunCoin
Sub issues PhunCoin to the holders of the Series F Warrants, we will obtain the consent of those Series F warrantholders representing
the requisite vote necessary to amend the Series F Warrants to provide for the assignment by us to PhunCoin Sub of all of our
obligations to issue PhunCoin. Pursuant to the amendment, PhunCoin Sub will fully and unconditionally assume all of our obligations
to issue PhunCoin that exist under the Series F Warrants. We will notify all Series F warrantholders of any amendment to the Series
F Warrants and the assignment by us, and the assumption by PhunCoin, of the obligations to issue PhunCoin and intend to file a
Current Report on Form 8-K once the amendment is entered into and becomes effective.
UPO
Warrants
In connection with Stellar’s initial
public offering, Stellar sold to the underwriters for $100 an option to purchase up to a total of 130,000 units, exercisable at
$11.50 per unit (or an aggregate exercise price of $1,495,000) upon the closing of the offering. The units issuable upon exercise
of the UPOs are identical to those offered in Stellar’s initial public offering.
REGISTRATION
RIGHTS
Registration
Rights Agreement
The
holders of the founder shares, the Sponsor Private Placement Warrants (and any shares of our common stock issuable upon the exercise
of the Sponsor Private Placement Warrants) and the Public Warrants are entitled to registration rights pursuant to the Stellar
Registration Rights Agreement, entered into as of August 18, 2016, between Stellar and certain securityholders. The holders of
the majority of these securities are entitled to make up to three demands, excluding short form demands, that we register such
securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements
filed subsequent to the completion of the business combination and rights to require us to register for resale such securities
pursuant to Rule 415 under the Securities Act. However, the Registration Rights Agreement provides that we will not permit any
registration statement filed under the Securities Act to become effective until termination of the applicable lock-up period,
which occurs (a) in the case of the founder shares, one year after the date of the consummation of our initial business combination
or earlier if, subsequent to our business combination, (i) the last sale price of our ordinary shares equals or exceeds $21.00
per share (as adjusted for share splits, share dividends, reorganizations and recapitalizations) for any 20 trading days within
any 30-trading day period commencing at least 150 days after our initial business combination or (ii) we consummate a subsequent
liquidation, merger, share exchange or other similar transaction which results in all of our shareholders having the right to
exchange their ordinary shares for cash, securities or other property; and (b) in the case of the Sponsor Private Placement Warrants
and the respective common stock underlying such warrants, 30 days after the completion of the initial business combination. We
will bear the expenses incurred in connection with the filing of any such registration statements.
Warrant
Agreement
Pursuant
to a second amended and restated Sponsor warrant purchase agreement, entered into on August 12, 2016, between Stellar and Continental,
as warrant agent, (the “Stellar Warrant Agreement”), Stellar agreed to use its best efforts to file a registration
statement with the SEC registering resales of shares of common stock issuable upon the exercise of the Sponsor Private Placement
Warrants and the Public Warrants, in addition to certain other securities, as soon as practicable, but in no event later than
30 business days after the closing of its initial business combination. Stellar agreed to use its best efforts to cause the same
to become effective and to maintain the effectiveness of such registration statement, and a current prospectus relating thereto,
until the expiration of the warrants. If any such registration statement has not been declared effective by the 90th business
day following the closing of the business combination, holders of the warrants shall have the right, during the period beginning
on the 91st business day after the closing of the business combination and ending upon such registration statement being declared
effective, and during any other period when we shall fail to have maintained an effective registration statement covering the
shares of common stock issuable upon exercise of the warrants, to exercise such warrants on a “cashless basis,” by
exchanging the warrants (in accordance with Section 3(a)(9) of the Securities Act or another exemption) for that number of shares
of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of our common stock underlying
the warrants, multiplied by the difference between the warrant price and the “Fair Market Value” (as defined in the
Stellar Warrant Agreement) by (y) the Fair Market Value.
Investors’
Rights Agreement
Certain of Phunware’s stockholders are
entitled to rights with respect to the registration of their shares under the Securities Act. These registration rights are contained
in Phunware’s amended and restated investors’ rights agreement (the “IRA”) dated as of October 25, 2016,
as amended December 21, 2018. The registration rights set forth in the IRA will expire on the earlier of five years following
the completion of an IPO (as defined in the IRA), or, with respect to any particular stockholder, when such stockholder is able
to sell all of its shares entitled to registration rights pursuant to Rule 144 of the Securities Act during any 90-day period.
The securities held by securityholders subject to the IRA are subject to a Lock-Up, which we have the ability to waive at any
time for any particular holder.
Series
A Registration Rights Agreement
The holders of our Series A convertible preferred
stock are entitled to rights with respect to the registration of their shares under the Securities Act. These registration rights
are contained in our Series A registration rights agreement (the “Series A Registration Rights Agreement”) dated as
of December 26, 2018. Upon the conversion of the Series A convertible preferred stock into shares of our common stock, we are
required to file an initial registration statement under the Securities Act to register such shares of common stock within 45
calendar days of such conversion, subject to certain exceptions. We will use our best efforts to cause a registration statement
filed under the Series A Registration Rights Agreement to be declared effective under the Securities Act, and shall use our best
efforts to keep such registration statement continuously effective under the Securities Act until the date that all such shares
covered by the registration statement have been sold thereunder or pursuant to Rule 144, or may be sold without volume or manner-of-sale
restrictions pursuant to Rule 144 and without the requirement for us to be in compliance with the current public information requirement
under Rule.
Unit
Purchase Options
Pursuant to that certain Unit Purchase Option,
between Stellar and the underwriters in connection with Stellar’s initial public offering, such underwriters are entitled
to rights with respect to the registration of their shares under the Securities Act. If at any time during a period of five (5)
years commencing on August 18, 2016 when there is not an effective registration statement, the underwriters may demand in writing
that we file a registration statement covering the securities within sixty (60) days. We shall bear all fees and expenses attendant
to registering the securities, including the expenses of one legal counsel, but the holders shall pay any and all underwriting
commissions. We shall cause any registration statement to remain effective for a period of the later of (a) the exercise
period of the UPO Warrants or (b) two (2) years from the effective date of such registration statement, subject to certain
standard exceptions. If at any time during a period of seven (7) years commencing on August 18, 2016 when there is not an effective
registration statement covering all of the securities pursuant to the UPOs, the holder has piggy-back rights, subject to certain
standard exceptions.
ANTI-TAKEOVER
EFFECTS OF DELAWARE LAW AND OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS
Our
amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could have the effect
of delaying, deferring, or discouraging another party from acquiring control of us. These provisions and certain provisions of
Delaware law, which are summarized below, could discourage takeovers, coercive or otherwise. These provisions are also designed,
in part, to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that
the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh
the disadvantages of discouraging a proposal to acquire us.
Undesignated
Preferred Stock
. As discussed above under “—
Preferred Stock
,” our board of directors has the ability
to designate and issue preferred stock with voting or other rights or preferences that could deter hostile takeovers or delay
changes in our control or management.
Limits
on Ability of Stockholders to Act by Written Consent or Call a Special Meeting
. Our amended and restated certificate of incorporation
provides that our stockholders may not act by written consent. This limit on the ability of stockholders to act by written consent
may lengthen the amount of time required to take stockholder actions. As a result, the holders of a majority of our capital stock
are not able to amend the amended and restated bylaws or remove directors without holding a meeting of stockholders called in
accordance with the amended and restated bylaws.
In
addition, our amended and restated bylaws provide that special meetings of the stockholders may be called only by our board of
directors, the chairperson of our board of directors, our chief executive officer, our president or our secretary. A stockholder
may not call a special meeting, which may delay the ability of our stockholders to force consideration of a proposal or for holders
controlling a majority of our capital stock to take any action, including the removal of directors.
Requirements
for Advance Notification of Stockholder Nominations and Proposals
. Our amended and restated bylaws contain advance notice
procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations
made by or at the direction of our board of directors or a committee of the board of directors. These advance notice procedures
may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed and may
also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect its own slate of directors or
otherwise attempt to obtain control of our company.
Board
Classification
. Our board of directors is divided into three classes. The directors in each class serve for a three-year term,
one class being elected each year by our stockholders. This system of electing and removing directors may discourage a third party
from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders
to replace a majority of the directors.
Delaware
Anti-Takeover Statute
. We are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating
corporate takeovers. In general, Section 203 prohibits a publicly held Delaware corporation from engaging, under certain circumstances,
in a business combination with an interested stockholder for a period of three years following the date the person became an interested
stockholder unless:
|
●
|
prior
to the date of the transaction, our board of directors approved either the business combination
or the transaction that resulted in the stockholder becoming an interested stockholder;
|
|
●
|
upon
completion of the transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for purposes
of determining the voting stock outstanding but not the outstanding voting stock owned
by the interested stockholder, (1) shares owned by persons who are directors and also
officers and (2) shares owned by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
|
|
●
|
at
or subsequent to the date of the transaction, the business combination is approved by
our board of directors and authorized at an annual or special meeting of stockholders,
and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
|
Generally,
a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested
stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior
to the determination of interested stockholder status, owned 15% or more of a corporation’s outstanding voting stock. We
expect the existence of this provision to have an anti-takeover effect with respect to transactions our board of directors does
not approve in advance. We also anticipate that Section 203 may discourage attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
The
provisions of Delaware law and the provisions of our amended and restated certificate of incorporation and amended and restated
bylaws could have the effect of discouraging others from attempting hostile takeovers and as a consequence, they might also inhibit
temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts.
These provisions might also have the effect of preventing changes in our management. It is also possible that these provisions
could make it more difficult to accomplish transactions that stockholders might otherwise deem to be in their best interests.
RULE
144
A
person who has beneficially owned restricted shares of common stock for at least six months would be entitled to sell their shares
provided that (1) such person is not deemed to have been one of our affiliates at the time of, or at any time during the
three months preceding, a sale and (2) We are subject to the Exchange Act periodic reporting requirements for at least three
months before the sale. Persons who have beneficially owned restricted shares of common stock for at least six months but who
are our affiliates at the time of, or any time during the three months preceding, a sale, would be subject to additional restrictions,
by which such person would be entitled to sell within any three-month period a number of shares that does not exceed the greater
of either of the following:
|
●
|
1%
of the number of shares then outstanding; and
|
|
●
|
the
average weekly trading volume of the shares of common stock during the four calendar
weeks preceding the filing of a notice on Form 144 with respect to the sale.
|
Sales
under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public
information about our company.
Restrictions
on the Use of Rule 144 by Shell Companies or Former Shell Companies
Rule 144
is not available for the resale of securities initially issued by shell companies (other than business combination related shell
companies) or issuers that have been at any time previously a shell company. However, Rule 144 also includes an important
exception to this prohibition if the following conditions are met:
|
●
|
the
issuer of the securities that was formerly a shell company has ceased to be a shell company;
|
|
●
|
the
issuer of the securities is subject to the reporting requirements of Section 13
or 15(d) of the Exchange Act;
|
|
●
|
the
issuer of the securities has filed all Exchange Act reports and material required to
be filed, as applicable, during the preceding 12 months (or such shorter period
that the issuer was required to file such reports and materials), other than Form 8-K
reports; and
|
|
●
|
at
least one year has elapsed from the time that the issuer filed current Form 10 type
information with the SEC reflecting its status as an entity that is not a shell company.
|
Following
the consummation of the business combination, we are no longer a shell company, and so, once the conditions set forth in the exceptions
listed above are satisfied, Rule 144 will become available for the resale of the above noted restricted securities.
TRANSFER
AND WARRANT AGENT AND REGISTRAR
The
transfer and warrant agent for our common stock is Continental Stock Transfer & Trust Company, which is located at 1
State Street Plaza, 30th Floor, New York, New York 10004.
EXCHANGE
LISTING
Our
common stock is listed on Nasdaq under the symbol “PHUN” and our warrants are listed on Nasdaq under the symbol “PHUNW”.
PLAN
OF DISTRIBUTION
We are registering the Securities
covered by this prospectus to permit the selling securityholders to conduct public secondary trading of these Securities from
time to time after the date of this prospectus. We will not receive any of the proceeds of the sale of the Securities offered
by this prospectus. 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. See the section titled “
Use of
Proceeds.
” The aggregate proceeds to the selling securityholders from the sale of the Securities will be the
purchase price of the Securities less any discounts and commissions. We will not pay any brokers’ or
underwriters’ discounts and commissions in connection with the registration and sale of the Securities covered by this
prospectus. The selling securityholders reserve the right to accept and, together with their respective agents, to reject,
any proposed purchases of Securities to be made directly or through agents.
The
Securities offered by this prospectus may be sold from time to time to purchasers:
|
●
|
directly
by the selling securityholders, or
|
|
●
|
through
underwriters, broker-dealers or agents, who may receive compensation in the form of discounts,
commissions or agent’s commissions from the selling securityholders or the purchasers
of the Securities.
|
Any
underwriters, broker-dealers or agents who participate in the sale or distribution of the Securities may be deemed to be “underwriters”
within the meaning of the Securities Act. As a result, any discounts, commissions or concessions received by any such broker-dealer
or agents who are deemed to be underwriters will be deemed to be underwriting discounts and commissions under the Securities Act.
Underwriters are subject to the prospectus delivery requirements of the Securities Act and may be subject to certain statutory
liabilities under the Securities Act and the Exchange Act. We will make copies of this prospectus available to the selling securityholders
for the purpose of satisfying the prospectus delivery requirements of the Securities Act. To our knowledge, there are currently
no plans, arrangements or understandings between the selling securityholders and any underwriter, broker-dealer or agent regarding
the sale of the Securities by the selling securityholders.
The
Securities may be sold in one or more transactions at:
|
●
|
prevailing
market prices at the time of sale;
|
|
●
|
prices
related to such prevailing market prices;
|
|
●
|
varying
prices determined at the time of sale; or
|
These
sales may be effected in one or more transactions:
|
●
|
on
any national securities exchange or quotation service on which the Securities may be
listed or quoted at the time of sale, including Nasdaq;
|
|
●
|
in
the over-the-counter market;
|
|
●
|
in
transactions otherwise than on such exchanges or services or in the over-the-counter
market;
|
|
●
|
any
other method permitted by applicable law; or
|
|
●
|
through
any combination of the foregoing.
|
These
transactions may include block transactions or crosses. Crosses are transactions in which the same broker acts as an agent on
both sides of the trade.
At
the time a particular offering of the Securities is made, a prospectus supplement, if required, will be distributed, which will
set forth the name of the selling securityholders, the aggregate amount of Securities being offered and the terms of the offering,
including, to the extent required, (1) the name or names of any underwriters, broker-dealers or agents, (2) any discounts, commissions
and other terms constituting compensation from the selling securityholders and (3) any discounts, commissions or concessions allowed
or reallowed to be paid to broker-dealers. We may suspend the sale of Securities by the selling securityholders pursuant to this
prospectus for certain periods of time for certain reasons, including if the prospectus is required to be supplemented or amended
to include additional material information.
The
selling securityholders will act independently of us in making decisions with respect to the timing, manner, and size of each
resale or other transfer. There can be no assurance that the selling securityholders will sell any or all of the Securities under
this prospectus. Further, we cannot assure you that the selling securityholders will not transfer, distribute, devise or gift
the Securities by other means not described in this prospectus. In addition, any Securities covered by this prospectus that qualify
for sale under Rule 144 of the Securities Act may be sold under Rule 144 rather than under this prospectus. The Securities
may be sold in some states only through registered or licensed brokers or dealers. In addition, in some states the Securities
may not be sold unless they have been registered or qualified for sale or an exemption from registration or qualification is available
and complied with.
The
selling securityholders and any other person participating in the sale of the Securities will be subject to the Exchange Act.
The Exchange Act rules include, without limitation, Regulation M, which may limit the timing of purchases and sales of any
of the Securities by the selling securityholders and any other person. In addition, Regulation M may restrict the ability
of any person engaged in the distribution of the Securities to engage in market-making activities with respect to the particular
Securities being distributed. This may affect the marketability of the Securities and the ability of any person or entity to engage
in market-making activities with respect to the Securities.
With
respect to those Securities being registered pursuant to the Registration Rights Agreement, we have agreed to indemnify or provide
contribution to the selling securityholders and all of their officers, directors and control persons, as applicable, and certain
underwriters effecting sales of the Securities against certain liabilities, including certain liabilities under the Securities
Act. The selling securityholders have agreed to indemnify us in certain circumstances against certain liabilities, including certain
liabilities under the Securities Act. The selling securityholders may indemnify any broker or underwriter that participates in
transactions involving the sale of the Securities against certain liabilities, including liabilities arising under the Securities
Act.
With respect to those Securities being registered pursuant to the Series A Registration Rights Agreement,
we have agreed to indemnify or provide contribution to the selling securityholders and all of their officers, directors, members,
partners, agents brokers, investment advisors and employees, as applicable, and any person who controls any such holder, against
certain liabilities, including certain liabilities under the Securities Act. The selling securityholders have agreed to indemnify
us in certain circumstances against certain liabilities, including certain liabilities under the Securities Act. The selling securityholders
may indemnify any broker or underwriter that participates in transactions involving the sale of the Securities against certain
liabilities, including liabilities arising under the Securities Act.
For
additional information regarding expenses of registration, see the section titled “
Use of Proceeds
.”
Exercise
of Warrants
The
Warrants may be exercised upon the surrender of the certificate evidencing such warrant on or before the expiration date at the
offices of the warrant agent, Continental Stock Transfer & Trust Company, in the Borough of Manhattan, City and State
of New York, with the subscription form, as set forth in the Warrants, duly executed, accompanied by full payment of the exercise
price, by certified or official bank check payable to us, for the number of Warrants being exercised. The Warrants will be required
to be exercised on a cashless basis in the event of a redemption of the Warrants pursuant to the warrant agreement governing such
Warrants in which our board of directors has elected to require all holders of the Warrants who exercise their Warrants to do
so on a cashless basis. In such event, such holder may exercise his, her or its warrants on a cashless basis by paying the exercise
price by surrendering his, her or its warrants for that number of shares of common stock equal to the quotient obtained by dividing
(x) the product of the number of shares of common stock underlying the Warrants to be exercised, multiplied by the difference
between the exercise price of the Warrants and the “Fair market value” (defined below) by (y) the Fair Market
Value. The Fair Market Value” means the average last sale price of our common stock for the 10 trading days ending on the
third trading day prior to the date on which the notice of warrant exercise is sent to the warrant agent.
No
fractional shares will be issued upon the exercise of the Warrants. If, upon the exercise of the Warrants, a holder would be entitled
to receive a fractional interest in a share, we will, upon the exercise, round up or down to the nearest whole number the number
of shares of common stock to be issued to such holder, pursuant to the agreement governing such Warrant.
LEGAL
MATTERS
The
validity of the Securities offered hereby has been passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements of
Phunware, Inc. at December 31, 2016, and for the year then ended, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon (which
contains an explanatory paragraph describing conditions that raise substantial doubt about Phunware's ability to continue as a
going concern as described in Note 1 to the consolidated financial statements) appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as an expert in accounting and auditing.
The consolidated financial statements of
Phunware at December 31, 2017 and for the year ended December 31, 2017, appearing in this Prospectus and Registration Statement
have been audited by Marcum LLP (“Marcum”), an independent registered public accounting firm, as set forth in their
report and are included in reliance on such report given on the authority of such firm as an expert in auditing and accounting.
The financial statements of Stellar Acquisition
III, Inc. at November 30, 2017 and 2016, and for the year ended November 30, 2017 and for the period from December 8, 2015 (inception)
to November 30, 2016 appearing in this Prospectus and Registration Statement have been audited by WithumSmith+Brown, PC, independent
registered public accounting firm, as set forth in their report and are included in reliance on such report given on the authority
of such firm as an expert in auditing and accounting.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
have filed with the SEC a registration statement on Form S-1 under the Securities Act that registers the shares of our common
stock and the warrants to be sold in this offering. The registration statement, including the attached exhibits and schedules,
contains additional relevant information about us and our capital stock. The rules and regulations of the SEC allow us to omit
from this prospectus certain information included in the registration statement. For further information about us and the Securities,
you should refer to the registration statement and the exhibits and schedules filed with the registration statement. With respect
to the statements contained in this prospectus regarding the contents of any agreement or any other document, in each instance,
the statement is qualified in all respects by the complete text of the agreement or document, a copy of which has been filed as
an exhibit to the registration statement.
We
are subject to the informational reporting requirements of the Exchange Act. We file reports, proxy statements and other information
with the SEC under the Exchange Act. Our SEC filings are available over the Internet at the SEC’s website at http://www.sec.gov.
Our website address is www.phunware.com. The information on, or that can be accessed through, our website is not part of this
prospectus.
EXPLANATORY
NOTE
AS
DISCUSSED IN NOTE 1 TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF PHUNWARE, INC. FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2017 AND 2018 INCLUDED HEREIN, THE RELATED FINANCIAL STATEMENTS REFLECT AND ARE BASED UPON, THE CAPITAL STRUCTURE OF pHUNWARE,
INC., A DELAWARE CORPORATION PRIOR TO GIVING EFFECT TO THE BUSINESS COMBINATION WITH sTELLAR ACQUISITION iii, INC., WHICH CLOSED
ON DECEMBER 26, 2018.
INDEX
TO FINANCIAL STATEMENTS
Phunware, Inc.
Stellar Acquisition
III, Inc.
PHUNWARE, INC. AND
SUBSIDIARIES
Consolidated Financial
Statements
as of December 31, 2016 and 2017
and for the Years Ended December 31, 2016 and 2017
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of
Phunware, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheet of Phunware, Inc. (the “Company”) as of December 31, 2017, the related consolidated statements of operations
and comprehensive loss, changes in convertible preferred stock and stockholders’ deficit, and cash flows of the year then
ended, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017,
and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
Explanatory Paragraph — Going Concern
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has
a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations
and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with
the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable
basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor
since 2017.
New York, NY
April 10, 2018
Report of Independent
Registered Public Accounting Firm
The Board of Directors and Shareholders of
Phunware, Inc.
We have audited the accompanying consolidated balance sheet
of Phunware, Inc. as of December 31, 2016, and the related consolidated statements of operations and comprehensive loss, changes
in convertible preferred stock and stockholders’ deficit and cash flows for the year then ended. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the consolidated financial position of Phunware, Inc. at December 31, 2016,
and the consolidated results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted
accounting principles.
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company has recurring losses from operations, has recurring negative cash flows from operations, and has stated
that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of
the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Austin, Texas
March 2, 2018
Phunware, Inc.
Consolidated Balance
Sheets
(In thousands)
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
308
|
|
|
$
|
12,629
|
|
Accounts receivable, net
|
|
|
6,206
|
|
|
|
8,060
|
|
Prepaid expenses and other current assets
|
|
|
385
|
|
|
|
413
|
|
Total current assets
|
|
$
|
6,899
|
|
|
$
|
21,102
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
128
|
|
|
|
255
|
|
Goodwill
|
|
|
25,886
|
|
|
|
25,786
|
|
Intangible assets, net
|
|
|
901
|
|
|
|
2,159
|
|
Other assets
|
|
|
187
|
|
|
|
196
|
|
Total assets
|
|
$
|
34,001
|
|
|
$
|
49,498
|
|
|
|
|
|
|
|
|
|
|
Liabilities, redeemable convertible preferred stock, and stockholders’ deficit
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,548
|
|
|
$
|
4,450
|
|
Accrued expenses
|
|
|
8,796
|
|
|
|
5,661
|
|
Deferred revenue
|
|
|
1,044
|
|
|
|
1,786
|
|
Capital lease liability
|
|
|
—
|
|
|
|
83
|
|
Preferred stock subscription payable
|
|
|
3,243
|
|
|
|
—
|
|
Factored receivables payable
|
|
|
1,816
|
|
|
|
780
|
|
Total current liabilities
|
|
$
|
18,447
|
|
|
$
|
12,760
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
387
|
|
|
|
480
|
|
Deferred revenue
|
|
|
7,165
|
|
|
|
2,932
|
|
Deferred rent
|
|
|
98
|
|
|
|
149
|
|
Total liabilities
|
|
$
|
26,097
|
|
|
$
|
16,321
|
|
Phunware, Inc.
Consolidated Balance
Sheets (continued)
(In thousands)
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Commitments and contingencies (see Note 7)
|
|
|
—
|
|
|
|
—
|
|
Redeemable convertible preferred stock Series A, $0.001 par value; 3,169 shares authorized, issued, and outstanding at December 31, 2017 and 2016; liquidation preference of $1,585 at December 31, 2017
|
|
$
|
1,609
|
|
|
$
|
1,609
|
|
Redeemable convertible preferred stock Series B, $0.001 par value; 2,012 shares authorized, issued, and outstanding at December 31, 2017 and 2016; liquidation preference of $1,710 at December 31, 2017
|
|
|
1,691
|
|
|
|
1,691
|
|
Redeemable convertible preferred stock Series C, $0.001 par value; 5,224 shares authorized, issued, and outstanding at December 31, 2017 and 2016; liquidation preference of $6,000 at December 31, 2017
|
|
|
5,962
|
|
|
|
5,962
|
|
Redeemable convertible preferred stock Series D, $0.001 par value; 3,709 shares authorized, issued, and outstanding at December 31, 2017 and 2016, liquidation preference of $8,383 at December 31, 2017
|
|
|
8,362
|
|
|
|
8,362
|
|
Redeemable convertible preferred stock Series D-1, $0.001 par value; 4,725 shares issued, and outstanding at December 31, 2017 and 2016; 4,757 shares authorized; liquidation preference of $11,996 at December 31, 2017
|
|
|
11,996
|
|
|
|
11,996
|
|
Redeemable convertible preferred stock Series E, $0.001 par value; 10,098 shares authorized, issued and outstanding at December 31, 2017 and 2016; liquidation preference of $31,000 at December 31, 2017
|
|
|
30,860
|
|
|
|
30,860
|
|
Redeemable convertible preferred stock Series F, $0.001 par value; 9,715 and 9,612 shares issued and outstanding at December 31, 2017 and 2016, respectively; 12,000 shares authorized; liquidation preference of $41,094 December 31, 2017
|
|
|
40,785
|
|
|
|
40,375
|
|
Redeemable convertible preferred stock Series Alpha, $0.001 par value; 3,277 shares issued and outstanding at December 31, 2017 and 2016; 3,400 shares authorized; liquidation preference of $10,060 at December 31, 2017
|
|
|
3,169
|
|
|
|
3,169
|
|
Redeemable convertible preferred stock Series Beta, $0.001 par value; 2,402 shares authorized, issued, and outstanding at December 31, 2017 and 2016; liquidation preference of $8,000 at December 31, 2017
|
|
|
1,592
|
|
|
|
1,592
|
|
Redeemable convertible preferred stock Series Gamma, $0.001 par value; 1,998 and 2,023 shares issued and outstanding at December 31, 2017 and 2016, respectively; 2,177 shares authorized, liquidation preference of $8,031 at December 31, 2017
|
|
|
1,379
|
|
|
|
1,379
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 75,000 shares authorized as of December 31, 2017 and 2016; 8,280 and 8,164 shares issued as of December 31, 2017 and 2016, respectively; 7,183 and 7,108 shares outstanding as of 2017 and 2016, respectively
|
|
|
7
|
|
|
|
7
|
|
Additional paid-in capital
|
|
|
2,856
|
|
|
|
2,728
|
|
Accumulated other comprehensive loss
|
|
|
(347
|
)
|
|
|
(474
|
)
|
Accumulated deficit
|
|
|
(102,017
|
)
|
|
|
(76,079
|
)
|
Total stockholders’ deficit
|
|
$
|
(99,501
|
)
|
|
$
|
(73,818
|
)
|
Total liabilities, redeemable convertible preferred stock, and stockholders’ deficit
|
|
$
|
34,001
|
|
|
$
|
49,498
|
|
The accompanying notes are an integral part
of these financial statements.
Phunware, Inc.
Consolidated Statements
of Operations and Comprehensive Loss
(In thousands)
|
|
For the Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net revenues
|
|
$
|
26,722
|
|
|
$
|
47,370
|
|
Cost of revenues
|
|
|
15,714
|
|
|
|
28,828
|
|
Gross profit
|
|
|
11,008
|
|
|
|
18,542
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
10,721
|
|
|
|
12,832
|
|
General and administrative
|
|
|
14,795
|
|
|
|
11,269
|
|
Research and development
|
|
|
11,108
|
|
|
|
9,877
|
|
Total operating expenses
|
|
|
36,624
|
|
|
|
33,978
|
|
Operating loss
|
|
|
(25,616
|
)
|
|
|
(15,436
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(397
|
)
|
|
|
(686
|
)
|
Other income (expense)
|
|
|
(13
|
)
|
|
|
(107
|
)
|
Total other income (expense)
|
|
|
(410
|
)
|
|
|
(793
|
)
|
Loss before taxes
|
|
|
(26,026
|
)
|
|
|
(16,229
|
)
|
Income tax benefit (expense)
|
|
|
88
|
|
|
|
(68
|
)
|
Net loss
|
|
|
(25,938
|
)
|
|
|
(16,297
|
)
|
Other comprehensive income
|
|
|
—
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
127
|
|
|
|
(327
|
)
|
Comprehensive loss
|
|
$
|
(25,811
|
)
|
|
$
|
(16,624
|
)
|
The accompanying notes are an integral part
of these financial statements.
Phunware, Inc.
Consolidated Statements
of Changes in Convertible Preferred Stock and Stockholders’ Deficit
(In thousands)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional Paid-in
|
|
|
Accumulated
|
|
|
Other Comprehensive
|
|
|
Total Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Deficit
|
|
Balances as of December 31, 2015
|
|
|
41,141
|
|
|
$
|
84,797
|
|
|
|
7,028
|
|
|
$
|
7
|
|
|
$
|
2,466
|
|
|
$
|
(59,782
|
)
|
|
$
|
(147
|
)
|
|
$
|
(57,456
|
)
|
Exercise of stock options, net of vesting of restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
80
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15
|
|
Repurchase of Series Gamma convertible preferred shares
|
|
|
(154
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of Series F convertible preferred stock, net of issuance costs
|
|
|
5,264
|
|
|
|
22,198
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
247
|
|
|
|
—
|
|
|
|
—
|
|
|
|
247
|
|
Cumulative translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(327
|
)
|
|
|
(327
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(16,297
|
)
|
|
|
—
|
|
|
|
(16,297
|
)
|
Balances as of December 31, 2016
|
|
|
46,251
|
|
|
$
|
106,995
|
|
|
|
7,108
|
|
|
$
|
7
|
|
|
$
|
2,728
|
|
|
$
|
(76,079
|
)
|
|
$
|
(474
|
)
|
|
$
|
(73,818
|
)
|
Exercise of stock options, net of vesting of restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
75
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
Repurchase of Series Gamma convertible preferred shares
|
|
|
(25
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of Series F convertible preferred stock, net of issuance costs
|
|
|
103
|
|
|
|
410
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
118
|
|
|
|
—
|
|
|
|
—
|
|
|
|
118
|
|
Cumulative translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
127
|
|
|
|
127
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,938
|
)
|
|
|
—
|
|
|
|
(25,938
|
)
|
Balances as of December 31, 2017
|
|
|
46,329
|
|
|
$
|
107,405
|
|
|
|
7,183
|
|
|
$
|
7
|
|
|
$
|
2,856
|
|
|
$
|
(102,017
|
)
|
|
$
|
(347
|
)
|
|
$
|
(99,501
|
)
|
The accompanying notes are an integral part
of these financial statements.
Phunware, Inc.
Consolidated Statements
of Cash Flows
(In thousands)
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,938
|
)
|
|
$
|
(16,297
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
154
|
|
|
|
261
|
|
Loss on disposal of fixed assets
|
|
|
—
|
|
|
|
12
|
|
Allowances for doubtful accounts receivable
|
|
|
3,101
|
|
|
|
112
|
|
Impairment of equity investment
|
|
|
|
|
|
|
75
|
|
Amortization of acquired intangibles
|
|
|
1,284
|
|
|
|
1,573
|
|
Non-cash interest/warrant accretion
|
|
|
—
|
|
|
|
(1
|
)
|
Stock-based compensation
|
|
|
118
|
|
|
|
247
|
|
Deferred income taxes
|
|
|
(93
|
)
|
|
|
94
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,243
|
)
|
|
|
233
|
|
Prepaid expenses and other assets
|
|
|
46
|
|
|
|
113
|
|
Accounts payable
|
|
|
(903
|
)
|
|
|
(601
|
)
|
Accrued expenses
|
|
|
2,993
|
|
|
|
2,960
|
|
Deferred revenue
|
|
|
3,491
|
|
|
|
615
|
|
Net cash used in operating activities
|
|
$
|
(16,990
|
)
|
|
$
|
(10,604
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(27
|
)
|
|
$
|
(28
|
)
|
Net cash used for investing activities
|
|
$
|
(27
|
)
|
|
$
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Net payments on line of credit
|
|
$
|
—
|
|
|
$
|
(4,342
|
)
|
Payments on capital lease obligation
|
|
|
(83
|
)
|
|
|
(204
|
)
|
Net proceeds from factoring agreement
|
|
|
1,036
|
|
|
|
780
|
|
Proceeds from exercise of options to purchase common stock
|
|
|
10
|
|
|
|
15
|
|
Proceeds from preferred stock subscriptions
|
|
|
3,243
|
|
|
|
—
|
|
Proceeds from issuances of convertible stock, net of issuance costs
|
|
|
410
|
|
|
|
22,198
|
|
Net cash provided by financing activities
|
|
$
|
4,616
|
|
|
$
|
18,447
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash
|
|
$
|
80
|
|
|
$
|
(15
|
)
|
Net (decrease) increase in cash
|
|
|
(12,321
|
)
|
|
|
7,800
|
|
Cash – beginning of year
|
|
|
12,629
|
|
|
|
4,829
|
|
Cash – end of year
|
|
$
|
308
|
|
|
$
|
12,629
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
381
|
|
|
$
|
650
|
|
The accompanying notes are an integral part
of these financial statements.
Phunware,
Inc.
Notes to Consolidated Financial Statements
(In Thousands, except share and per share information)
1. The Company and Basis of Presentation
The Company
Phunware, Inc. (the Company) is a provider
of Multiscreen as a Service (MaaS) solutions, an integrated customer engagement platform that enables organizations to develop
customized, immersive, branded mobile applications. The Company sells its services in vertical markets, including health care,
retail, hospitality, transportation, sports, and entertainment. The Company enables brands to engage, manage, and monetize their
anytime-anywhere mobile users. The Company’s MaaS technology is available in software development kit form for organizations
developing their own application, via customized development services, and prepackaged solutions. Through its integrated mobile
advertising platform of publishers and developers, the Company also maximizes mobile monetization through an advertising product
suite including self-service media buying, real-time bidding, publisher mediation and yield optimization, cross-platform ad creation,
and dynamic ad serving. Founded in 2009, the Company is a Delaware corporation headquartered in Austin, Texas.
Basis of Presentation
The consolidated financial statements have
been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP), and include the Company’s accounts
and those of its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
As of December 31, 2016, we adopted the provisions
of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 205-40, Presentation of Financial
Statements - Going Concern (ASC 205-40), which requires management to assess our ability to continue as a going concern for one
year after the date the financial statements are issued. Under ASC 205-40, management has the responsibility to evaluate whether
conditions and/or events raise substantial doubt about our ability to meet our future financial obligations as they become due
within one year after the date that the financial statements are issued. As required by this standard, management’s evaluation
shall initially not take into consideration the potential mitigating effects of management’s plans that have not been fully
implemented as of the date the financial statements are issued.
The Company’s assessment included the
preparation of a detailed cash forecast that included all projected cash inflows and outflows. Although the Company continues to
focus on growing its revenues, the Company’s ongoing operating expenditures will significantly exceed the revenue it expects
to receive for the foreseeable future. Additionally, the Company has a history of operating losses and negative operating cash
flows and expects these trends to continue into the foreseeable future.
Our future plans may include entering into
an agreement with a new strategic partner which would provide new working capital or cash funding, utilizing existing and obtaining
new credit lines, expanding credit lines, issuing our equity securities, including selling common stock and/or preferred stock,
and reducing overhead expenses. Despite a history of successfully implementing similar plans to alleviate the adverse financial
conditions, these sources of working capital are not currently assured, and consequently do not sufficiently mitigate the risks
and uncertainties disclosed above. There can be no assurance that the Company will be able to obtain additional funding on satisfactory
terms or at all. In addition, no assurance can be given that any such financing, if obtained, will be adequate to meet the Company’s
capital needs and support our growth. If additional funding cannot be obtained on a timely basis and on satisfactory terms, our
operations would be materially negatively impacted. We have therefore concluded there is substantial doubt about our ability to
continue as a going concern through one year from the issuance of these financial statements.
The accompanying consolidated financial statements
have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The accompanying consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that
may result from uncertainty related to our ability to continue as a going concern.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in
conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts in the
Company’s financial statements and accompanying notes. Actual results could differ from those estimates. Items subject to
the use of estimates include revenue recognition for contract completion, useful lives of long-lived assets including intangibles,
valuation of intangible assets acquired in business combinations, reserves and certain accrued liabilities, determination of the
provision for income taxes, and fair value of equity instruments.
Revenue Recognition
Revenue is recognized when all four of the
following criteria are met:
|
●
|
Persuasive evidence of an arrangement exists;
|
|
●
|
The service has been completed or services are actively being provided to the customer;
|
|
●
|
The amount of fees to be paid by the customer is fixed or determinable; and
|
|
●
|
The collection of fees is reasonably assured.
|
Platform Subscriptions and Services Revenue
The Company derives subscription revenue from
software license fees, which comprise subscription fees from customers licensing the Company’s 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.
These application development, license and
support fee arrangements represent software arrangements that are accounted for pursuant to the software revenue recognition guidance
of Accounting Standards Codification Topic (ASC) 985-605, Software — Revenue Recognition.
The Company typically receives 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 the Company to provide PCS over a fixed term. The Company is 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, the Company recognizes 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, the Company also provides
professional services by outsourcing employees’ time and materials to customers. Such amounts are typically recorded as the
services are delivered.
2.
Summary of Significant Accounting Policies
(cont.)
Application Transaction Revenue
The Company also generates revenue by charging
advertisers to deliver advertisements (ads) to users of mobile connected devices. Depending on the specific terms of each advertising
contract, the Company generally recognizes 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
the Company recognizes revenue at the time the user views, clicks, or otherwise acts on the ad. The Company sells ads through several
offerings: cost per thousand impressions, on which advertisers are charged for each ad delivered to 1,000 consumers; cost per click,
on which advertisers are charged for each ad clicked or touched on by a user; and cost per action, on which advertisers are charged
each time a consumer takes a specified action, such as downloading an app. In addition, the Company generates 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.
In the normal course of business, the Company
acts as an intermediary in executing transactions with third parties. The determination of whether revenue should be reported on
a gross or net basis is based on an assessment of whether the Company is acting as the principal or an agent in its transactions
with advertisers. The determination of whether the Company is acting as a principal or an agent in a transaction involves judgment
and is based on an evaluation of the terms of each arrangement. While none of the factors individually are considered presumptive
or determinative in reaching a conclusion on gross versus net revenue recognition, the Company places the most weight on the analysis
of whether it is the primary obligor in the arrangement. To date, the Company has determined that it is the primary obligor in
all advertising arrangements because it is responsible for identifying and contracting with third-party advertisers, which include
both advertising agencies or companies; establishing the selling prices of the advertisements sold; performing all billing and
collection activities, including retaining credit risk; and bearing sole responsibility for the suitability and fulfillment of
the advertising. Accordingly, the Company acts as the principal in all advertising arrangements and therefore reports revenue earned
and costs incurred related to these transactions on a gross basis.
The Company records deferred revenue when
it receives cash payments from advertiser clients in advance of when the services are performed under the arrangements with the
customer. The Company recognizes deferred revenue as revenue only when the revenue recognition criteria are met.
Fair Value of Financial Instruments
Authoritative guidance on fair value measurements
defines fair value, establishes a consistent framework for measuring fair value, and expands disclosures for each major asset and
liability category measured at fair value on either a recurring or non-recurring basis. Fair value is an exit price representing
the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would
use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 — Observable inputs such as
quoted prices in active markets.
Level 2 — Inputs, other than the quoted
prices in active markets, that are observable either directly or indirectly.
Level 3 — Unobservable inputs in which
there is little or no market data, which require the reporting entity to develop its own assumptions.
The fair value hierarchy also requires an
entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The carrying value of accounts receivable,
prepaid expenses, other current assets, accounts payable, and accrued expenses are considered to be representative of their respective
fair values because of the short-term nature of those instruments.
Concentrations of Credit Risk
The Company’s financial instruments
that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable. Although the Company
limits its exposure to credit loss by depositing its cash with established financial institutions that management believes have
good credit ratings and represent minimal risk of loss of principal, its deposits, at times, may exceed federally insured limits.
Collateral is not required for accounts receivable, and the Company believes the carrying value approximates fair value.
2.
Summary of Significant Accounting Policies
(cont.)
In the year ended December 31, 2017, revenue
from one customer represented approximately $11,804, or 44%, of the Company’s consolidated net revenues, and 24% of the Company’s
accounts receivable balance at December 31, 2017. In the year ended December 31, 2016, revenue from one customer represented $23,144
or 49%, of the Company’s consolidated net revenues, and 51% of the Company’s accounts receivable balance at December
31, 2016.
The chart below represents the Company’s
top three revenue sources and the percentage of net revenues and percentage of total trade credit extended as indicated in accounts
receivable balances at December 31, 2017 and 2016, respectively:
December 31, 2017
|
|
Net revenue
|
|
|
% of
Net revenue
|
|
|
% of
Accounts receivable, net
|
|
Customer A
|
|
$
|
11,804
|
|
|
|
44
|
%
|
|
|
24
|
%
|
Customer B
|
|
|
2,968
|
|
|
|
11
|
%
|
|
|
2
|
%
|
Customer D
|
|
|
1,760
|
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
$
|
16,532
|
|
|
|
62
|
%
|
|
|
35
|
%
|
December 31, 2016
|
|
Net revenue
|
|
|
% of
Net revenue
|
|
|
% of
Accounts receivable, net
|
|
Customer B
|
|
$
|
23,144
|
|
|
|
49
|
%
|
|
|
51
|
%
|
Customer A
|
|
|
3,454
|
|
|
|
7
|
%
|
|
|
6
|
%
|
Customer C
|
|
|
2,808
|
|
|
|
6
|
%
|
|
|
15
|
%
|
|
|
$
|
29,406
|
|
|
|
62
|
%
|
|
|
72
|
%
|
Cash
The Company considers all investments with
a maturity of three months or less from the date of acquisition to be cash equivalents. The Company had no cash equivalents at
December 31, 2017.
Accounts Receivable and Reserves
Accounts receivable are presented net of allowances.
The Company considers receivables past due based on the contractual payment terms. The Company makes judgments as to its ability
to collect outstanding receivables and records a bad debt allowance for receivables when collection becomes doubtful. The allowances
are based upon historical loss patterns, current and prior trends in its aged receivables, credit memo activity, and specific circumstances
of individual receivable balances. Accounts receivable consisted of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts receivable
|
|
$
|
9,295
|
|
|
$
|
8,172
|
|
Less allowances for doubtful accounts
|
|
|
(3,089
|
)
|
|
|
(112
|
)
|
Balance
|
|
$
|
6,206
|
|
|
$
|
8,060
|
|
2.
Summary of Significant Accounting Policies
(cont.)
Changes in the allowance for doubtful accounts
and sales allowance are as follows:
|
|
Balance at beginning of period
|
|
|
Allowances for bad debt charged to expense
|
|
|
Issuance of credit memos and write-off of accounts receivables
|
|
|
Balance at end of period
|
|
Year ended December 31, 2017 Allowance for doubtful accounts
|
|
$
|
112
|
|
|
$
|
3,101
|
|
|
$
|
(124
|
)
|
|
$
|
3,089
|
|
Year ended December 31, 2016 Allowance for doubtful accounts
|
|
$
|
—
|
|
|
$
|
112
|
|
|
$
|
—
|
|
|
$
|
112
|
|
Property and Equipment
Property and equipment are stated at cost,
net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful
lives of the related assets, generally ranging from three to seven years. Leasehold improvements are amortized over the shorter
of their useful lives or the remaining terms of the related leases.
Goodwill and Intangible Assets
Goodwill arises from purchase business combinations
and is measured as the excess of the cost of the business acquired over the sum of the acquisition-date fair values of tangible
and identifiable intangible assets acquired, less any liabilities assumed.
In accordance with ASC 350,
Intangibles
— Goodwill and Other
, the Company does not amortize goodwill or intangible assets with indefinite lives but rather assesses
their carrying value for indications of impairment annually, or more frequently if events or changes in circumstances indicate
that the carrying amount may be impaired.
The goodwill impairment test required by ASC
350 is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the
fair value of a reporting unit with its carrying amount, or the net book value of the company or reporting unit, including goodwill.
If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; thus,
the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second
step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. The Company attributes
goodwill to its sole reporting unit for impairment testing.
The enterprise fair value used by the Company
was derived from valuations utilizing a blending of both the income approach, whereby current and future estimated discounted cash
flows were utilized to calculate an operating value of the Company on a controlling interest basis, and the market approach, whereby
comparable company results are used to derive a fair value of the Company. The determination of whether goodwill has become impaired
involves a significant level of judgment in the assumptions underlying the approach used to determine the value of the reporting
unit. Changes in the Company’s strategy and/or market conditions could significantly impact these judgments and require adjustments
to recorded amounts of goodwill.
Identifiable intangible assets consist of
acquired trade names, customer lists, technology, in-process research and development, and order backlog associated with the acquired
businesses.
ASC 350 requires that intangible assets with
definite lives be amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances
indicate that an asset’s carrying value may not be recoverable in accordance with ASC 360,
Property, Plant, and Equipment
.
Amortization of finite-lived intangible assets
is calculated using either the straight-line or accelerated amortization model based on the Company’s best estimate of the
distribution of the economic value of the identifiable intangible assets.
The Company did not recognize any goodwill
or intangible impairment losses in the years ended December 31, 2017 or 2016.
2.
Summary of Significant Accounting Policies
(cont.)
Long-Lived Assets
In accordance with authoritative guidance,
the Company periodically re-evaluates the original assumptions and rationale utilized in the establishment of the carrying value
and estimated lives of all of its long-lived assets, including property and equipment. The determinants used for this evaluation
include management’s estimate of the asset’s ability to generate positive income from operations and positive cash
flow in future periods as well as the strategic significance of the asset to the Company’s business objective. The Company
did not recognize any impairment losses during the years ended December 31, 2017 or 2016.
Deferred Revenue
The Company’s deferred revenue balance
consisted of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current deferred revenue
|
|
|
|
|
|
|
Platform subscription and services revenue
|
|
$
|
910
|
|
|
$
|
1,684
|
|
Application transactions revenue
|
|
|
134
|
|
|
|
102
|
|
Total current deferred revenue
|
|
$
|
1,044
|
|
|
$
|
1,786
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred revenue
|
|
|
|
|
|
|
|
|
Platform subscription and services revenue
|
|
$
|
7,165
|
|
|
$
|
2,932
|
|
Total non-current deferred revenue
|
|
$
|
7,165
|
|
|
$
|
2,932
|
|
Total deferred revenue
|
|
$
|
8,209
|
|
|
$
|
4,718
|
|
Leases
Leases are reviewed and classified as capital
or operating at their inception. For leases that contain rent escalations or periods during the lease term where rent is not required,
the Company recognizes rent expense based on allocating the total rent payable on a straight-line basis over the term of the lease
excluding lease extension periods. The difference between rent payments and straight-line rent expense is recorded as deferred
rent on the consolidated balance sheets. Deferred rent that will be recognized during the succeeding 12-month period is recorded
as the current portion of deferred rent and the remainder is recorded as long-term deferred rent.
Under certain leases, the Company also receives
incentives for leasehold improvements, which are recognized as deferred rent if the Company determines they are owned by the Company.
Leasehold improvement incentives are amortized on a straight-line basis over the shorter of the lease term or estimated useful
life as a reduction to rent expense. The leasehold improvements are included in property and equipment, net and are amortized to
depreciation expense.
Advertising Costs
Advertising costs are expensed as incurred.
Total advertising costs were $200 and $82 for the years ended December 31, 2017 and 2016, respectively, and were included in sales
and marketing expenses on the consolidated statements of operations and comprehensive loss.
Retirement Plan
At December 31, 2017, the Company administered
one employee savings plan that qualified as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code (the
IRC). Under the savings plan, participating employees may contribute a portion of their pretax earnings, up to the Internal Revenue
Service annual contribution limit. No employer matching contributions were made to the savings plan during the years ended December
31, 2017 or 2016.
2.
Summary of Significant Accounting Policies
(cont.)
Income Taxes
The Company accounts for income taxes in accordance
with Financial Accounting Standards Board (FASB) ASC 740,
Income Taxes
. Under ASC 740, deferred tax assets and liabilities
reflect the future tax consequences of the differences between the financial reporting and tax bases of assets and liabilities
using current enacted tax rates. Valuation allowances are recorded when the realizability of such deferred tax assets does not
meet the more-likely-than-not threshold under ASC 740.
The accounting guidance on accounting for
uncertainty in income taxes prescribes a recognition threshold and measurement attribute criterion for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized,
a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company has not recognized
interest or penalties on the consolidated balance sheets or statements of operations and comprehensive loss.
Non-Marketable Equity Investment
During December 2013, the Company invested
$150 for a non-controlling equity investment in a privately held company. The Company’s investment in the privately held
company is reported using the cost method of accounting or marked down to fair value when an event or circumstance indicates an
other-than-temporary decline in value has occurred. During 2016, the Company determined an impairment of the investment existed.
As a result, the Company recorded a $75 impairment charge, which is included in other expenses in the consolidated statement of
operations and comprehensive income. The net investment is recorded in other non-current assets on the consolidated balance sheet.
Comprehensive Loss
The Company utilizes the guidance in ASC 220,
Comprehensive Income
, for the reporting and display of comprehensive loss and its components in the consolidated financial
statements. Comprehensive loss comprises net loss and cumulative foreign currency translation adjustments. The accumulated comprehensive
loss at December 31, 2017 and 2016, was due to foreign currency translation adjustments.
Recent Accounting Pronouncements
In May 2014, the FASB and the International
Accounting Standards Board jointly issued Accounting Standards Update No. (ASU) 2014-09,
Revenue from Contracts with Customers
,
which supersedes the revenue recognition requirements in ASC 605,
Revenue Recognition
. ASU 2014-09 is a comprehensive new
revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP and International
Financial Reporting Standards. The standard’s core principle is that a company will recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange
for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current authoritative
guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration
to include in the transaction price, and allocating the transaction price to each separate performance obligation.
This standard is effective for public entities
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. There is a one-year deferral
for non-public companies, but some companies that consider themselves private may have to follow the public company effective date
if they meet certain requirements. Early adoption is not permitted under U.S. GAAP, but non-public companies may adopt the new
standard as of the public entity effective date. This standard will impact those arrangements historically accounted for under
ASC 985-605. VSOE of fair value is not a requirement for separation under the new standard. As a result, certain amounts required
to be deferred under ASC 985-605 may be recognized as revenue sooner. The Company has 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 Company
will adopt the new standard effective January 1, 2019. The Company is currently evaluating the financial statement impact, if any,
of the new revenue recognition standard on its consolidated financial statements.
In 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
, which eliminates the current requirement for organizations
to present deferred tax liabilities and assets as current and non-current in a classified balance sheet. Instead, organizations
will be required to classify all deferred tax assets and liabilities as non-current. ASU 2015-17 is effective for consolidated
financial statements issued for annual periods beginning after December 15, 2017. The amendments may be applied prospectively to
all deferred tax liabilities and assets or retrospectively to all periods presented. Effective January 1, 2018, the Company is
adopting this guidance on its financial statements.
2.
Summary of Significant Accounting Policies
(cont.)
In February 2016, the FASB issued ASU No.
2016-02,
Leases
(Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities
that arise from leases. For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially
measured at the present value of the lease payments, in the statement of financial position. For leases with a term of 12 months
or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets
and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous generally accepted
accounting principles. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. Earlier application is permitted. In transition, lessees and lessors are required to recognize and measure leases
at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating
the effect that the adoption of this ASU will have on its financial statements.
In March 2016, the FASB issued ASU 2016-09
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The amendment
simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits
and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees’
maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are
expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for
the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted
in any interim or annual period. The Company has chosen to early adopt ASU 2016-09 on a prospective basis. There was no material
impact to the consolidated financial statements upon adoption.
3. Goodwill and Other Intangible Assets
Goodwill
Changes in the Company’s goodwill balance
for the years ended December 31, 2017 and 2016, are summarized in the table below
Balance at December 31, 2016
|
|
$
|
25,786
|
|
Foreign Currency Translation
|
|
|
100
|
|
Balance at December 31, 2017
|
|
$
|
25,886
|
|
Intangible Assets
The Company’s intangible assets, excluding
goodwill, consist of intangible assets acquired in business combinations and were recorded at their estimated fair values on the
date of acquisition. The finite-lived intangible assets that are being amortized are summarized in the table below
|
|
Weighted Average
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Useful
Life
(Years)
|
|
Gross Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
|
Gross Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
Trade name
|
|
4.6
|
|
$
|
650
|
|
|
$
|
(650
|
)
|
|
$
|
—
|
|
|
$
|
647
|
|
|
$
|
(532
|
)
|
|
$
|
115
|
|
Acquired technology
|
|
5.1
|
|
|
4,828
|
|
|
|
(4,714
|
)
|
|
|
114
|
|
|
|
4,828
|
|
|
|
(3,975
|
)
|
|
|
853
|
|
In-process research and development
|
|
5
|
|
|
94
|
|
|
|
(85
|
)
|
|
|
9
|
|
|
|
94
|
|
|
|
(66
|
)
|
|
|
28
|
|
Customer relationships
|
|
5.7
|
|
|
4,626
|
|
|
|
(3,848
|
)
|
|
|
778
|
|
|
|
4,550
|
|
|
|
(3,387
|
)
|
|
|
1,163
|
|
Order backlog
|
|
1.5
|
|
|
329
|
|
|
|
(329
|
)
|
|
|
—
|
|
|
|
329
|
|
|
|
(329
|
)
|
|
|
—
|
|
|
|
|
|
$
|
10,527
|
|
|
$
|
(9,626
|
)
|
|
$
|
901
|
|
|
$
|
10,448
|
|
|
$
|
(8,289
|
)
|
|
$
|
2,159
|
|
Amortization expense for the years ended December
31, 2017 and 2016, was approximately $1,284 and $1,573 respectively.
3.
Goodwill and Other Intangible Assets
(cont.)
Expected future annual amortization expense
for finite-lived intangible assets as of December 31, 2017, is as follows:
Year
|
|
Amortization
|
|
2018
|
|
$
|
375
|
|
2019
|
|
|
274
|
|
2020
|
|
|
141
|
|
2021
|
|
|
90
|
|
2022
|
|
|
21
|
|
Total
|
|
$
|
901
|
|
4. Property and Equipment
Property and equipment are stated at cost,
net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful
lives of the related assets, generally ranging from three to seven years. Leasehold improvements are amortized over the shorter
of their useful lives or the remaining terms of the related leases. The estimated useful lives of property and equipment consist
of the following:
|
|
Life (years)
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Equipment
|
|
3-5
|
|
$
|
907
|
|
|
$
|
880
|
|
Furniture and fixtures
|
|
7
|
|
|
32
|
|
|
|
32
|
|
Leasehold improvements
|
|
5 or remaining lease term
|
|
|
241
|
|
|
|
241
|
|
|
|
|
|
|
1,180
|
|
|
|
1,153
|
|
Less: Accumulated depreciation
|
|
|
|
|
(1,052
|
)
|
|
|
(898
|
)
|
|
|
|
|
$
|
128
|
|
|
$
|
255
|
|
Total depreciation expense was $154 and $261
for the years ended December 31, 2017 and 2016, respectively.
5. Accrued Expenses
Accrued expenses consist of the following
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Partner revenue share
|
|
$
|
6,522
|
|
|
$
|
3,742
|
|
Payroll related
|
|
|
1,545
|
|
|
|
1,556
|
|
Taxes
|
|
|
118
|
|
|
|
152
|
|
Other
|
|
|
611
|
|
|
|
211
|
|
Total accrued expenses
|
|
$
|
8,796
|
|
|
$
|
5,661
|
|
6. Notes Payable
Loan and Security Agreement
In December 2012, the Company entered into
a term loan (Loan and Security Agreement) with Bridge Bank in the amount of $4 million with a maturity date of December 10, 2016.
The Loan and Security Agreement required monthly payments of all accrued interest due on the tenth day of each calendar month for
the first six months beginning on January 10, 2013. The Loan and Security Agreement subsequently required all principal and all
accrued interest due on the tenth day of each calendar month beginning on July 10, 2013, for the following 42 months. The Loan
and Security Agreement bore interest at a rate of prime plus 2%. Prime rate means the greater of 3.25% or the variable rate of
interest, per annum, most recently announced by Bridge Bank as its prime rate. The Loan and Security Agreement was collateralized
by 65% of the outstanding shares of the Company and substantially all of the assets of the Company. The principal was borrowed
by the Company concurrent with the Company’s acquisition of TapIt.
Amended and Restated Loan and Security
Agreement
In November 2013, the Company amended and
restated the Loan and Security Agreement with Bridge Bank to convert the term loan to a revolving line of credit up to $5 million
with a maturity date of November 27, 2015. The amended and restated Loan and Security Agreement required monthly payments of all
accrued interest due on the tenth day of each calendar month beginning on December 10, 2013. The amended and restated Loan and
Security Agreement bore interest at a rate of prime plus 0.75%. Prime rate means the greater of 3.25% or the variable rate of interest,
per annum, most recently announced by Bridge Bank as its prime rate. The amended and restated Loan and Security Agreement is collateralized
by 65% of the outstanding shares of the Company’s wholly owned foreign subsidiaries and substantially all of the assets of
the Company and its domestic wholly owned subsidiaries. The Company accounted for the modification of the Loan and Security Agreement
as a debt modification.
In May 2014, the Company amended the amended
and restated Loan and Security Agreement with Bridge Bank to increase the revolving line of credit to a maximum of $10 million.
There were no changes made to the maturity date, interest rate, payment terms, or collateral. The Loan and Security Agreement with
Bridge Bank was further amended in 2015 and 2016 and ultimately paid in full and terminated in June 2016.
There were no amounts due and outstanding
under the Loan and Security Agreement as of December 31, 2017 and 2016.
Factoring Agreement
On June 15, 2016 the Company entered into
a factoring agreement with CSNK Working Capital Finance Corp. (d/b/a Bay View Funding) (“Bay View”) whereby it sells
select accounts receivable with recourse.
Under the terms of the agreement, Bay View
may make advances to the Company of amounts representing up to 80% of the net amount of eligible accounts receivable. The factor
facility was collateralized by a general security agreement over all the Company’s personal property and interests. Fees
paid to Bay View for factored receivables are 1.80% for the first 30 days and is and 0.65% for every ten days thereafter, to a
maximum of 90 days total outstanding. The Company bears the risk of credit loss on the receivables. These receivables are accounted
for as a secured borrowing arrangement and not as a sale of financial assets.
Factor expense of $391 and $561 for the years
ended December 31, 2017 and 2016 respectively, is recorded as interest expense in other expense on the consolidated statement of
comprehensive loss. The amount of the factored receivables outstanding was $1,816 and $780 as of December 31, 2017 and 2016, respectively.
There was $1,184 available for future advances as of December 31, 2017.
7. Commitments and Contingencies
Leases
The Company has operating office space leases
in Austin, Texas; Newport Beach, California; San Diego, California; Miami, Florida; New York, New York, and London, U.K. Rent expense
under operating leases totaled $634 and $694 for the years ended December 31, 2017 and 2016, respectively.
7.
Commitments and Contingencies
(cont.)
Future minimum annual lease payments under
the Company’s operating leases are as follows;
Future minimum lease obligations Years ended December 31,
|
|
Lease obligations
|
|
2018
|
|
$
|
689
|
|
2019
|
|
|
520
|
|
2020
|
|
|
51
|
|
2021
|
|
|
—
|
|
2022
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
1,260
|
|
Litigation
On September 26, 2017, we filed a breach of
contract complaint against Uber Technologies, Inc. (“Uber”) seeking approximately $3 million (plus interest) for unpaid
invoices for advertising campaign services provided for Uber in the first quarter of 2017. On November 13, 2017, Uber generally
denied the allegations in our complaint and also filed a cross-complaint against us and Fetch Media, Ltd. (“Fetch”)
— the advertising agency Uber retained to run its mobile advertising campaign for the period 2014 through the first quarter
of 2017 (the “Fetch Campaign”), asserting numerous fraud and contract-based claims. All the claims stem from Uber’s
assertion that Fetch and/or the Company (and/or other-as-yet-unidentified ad networks and publishers) are liable for the fraud-infested
Fetch Campaign, under which Uber overpaid Fetch and mobile advertising providers due to fraudulent attribution for installments
of the Uber application. Uber does not allege any specific dollar amount that it is seeking in damages against either of the named
cross-defendants (Fetch and Phunware). We filed a motion to dismiss the cross-complaint, which was heard on February 7, 2018. The
motion was granted in part and denied in part by the Court. The parties are just beginning to exchange documents in discovery.
The Company has maintained that our claims against Uber are meritorious and that Uber’s claims against us are not. However,
we make no predictions on the likelihood of success of prevailing on our contract action against Uber or on the likelihood of defeating
Uber’s claims against us. The Company has recorded as bad debt expense of $3,089 for the unpaid invoices alleged in this
lawsuit for the year ended December 31, 2017.
On September 8, 2017, the Company and Greater
Houston Convention and Visitors Bureau (“GHCVB”) initiated litigation in a breach of contract dispute. The dispute
concerned an October 2016 agreement for the Company to develop a mobile application and advertising campaign for GHCVB. The dispute
concerns an October 2016 agreement for us to develop a mobile application and advertising campaign for GHCVB. We seek approximately
$1.5 million (plus interest) for unpaid amounts provided by that agreement for certain project milestones that occurred, and for
early termination by GHCVB. In the alternative, we seek approximately $500, calculated on an hourly basis provided by the agreement,
for work performed for GHCVB. Each side also seeks to recover its attorneys’ fees. The parties recently mediated this dispute
with the assistance of a private mediator. The mediation was successful and the parties are currently in the process of preparing
a definitive settlement agreement.
From time to time, the Company is and may
become involved in various legal proceedings in the ordinary course of business. The outcomes of our legal proceedings are inherently
unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular
reporting period. In addition, for the matters disclosed above that do not include an estimate of the amount of loss or range of
losses, such an estimate is not possible, and we may be unable to estimate the possible loss or range of losses that could potentially
result from the application of non-monetary remedies.
8. Convertible Preferred Stock
The following table summarizes the Company’s
convertible preferred stock authorized, issued, and outstanding as of December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
Shares Authorized
|
|
|
Shares Issued and Outstanding
|
|
|
Liquidation Price Per Share
|
|
|
Shares Authorized
|
|
|
Shares Issued and Outstanding
|
|
|
Liquidation Price Per Share
|
|
Series A convertible preferred stock
|
|
|
3,169,089
|
|
|
|
3,169,089
|
|
|
$
|
0.50
|
|
|
|
3,169,089
|
|
|
|
3,169,089
|
|
|
$
|
0.50
|
|
Series B convertible preferred stock
|
|
|
2,011,990
|
|
|
|
2,011,990
|
|
|
$
|
0.85
|
|
|
|
2,011,990
|
|
|
|
2,011,990
|
|
|
$
|
0.85
|
|
Series C convertible preferred stock
|
|
|
5,223,742
|
|
|
|
5,223,742
|
|
|
$
|
1.15
|
|
|
|
5,223,742
|
|
|
|
5,223,742
|
|
|
$
|
1.15
|
|
Series D convertible preferred stock
|
|
|
3,709,078
|
|
|
|
3,709,078
|
|
|
$
|
2.26
|
|
|
|
3,709,078
|
|
|
|
3,709,078
|
|
|
$
|
2.26
|
|
Series D-1 convertible preferred stock
|
|
|
4,757,261
|
|
|
|
4,724,873
|
|
|
$
|
2.54
|
|
|
|
4,757,261
|
|
|
|
4,724,873
|
|
|
$
|
2.54
|
|
Series E convertible preferred stock
|
|
|
10,097,720
|
|
|
|
10,097,720
|
|
|
$
|
3.07
|
|
|
|
10,097,720
|
|
|
|
10,097,720
|
|
|
$
|
3.07
|
|
Series F convertible preferred stock
|
|
|
12,000,000
|
|
|
|
9,714,903
|
|
|
$
|
4.23
|
|
|
|
12,000,000
|
|
|
|
9,611,713
|
|
|
$
|
4.23
|
|
Series Alpha convertible preferred stock
|
|
|
3,400,000
|
|
|
|
3,277,191
|
|
|
$
|
3.07
|
|
|
|
3,400,000
|
|
|
|
3,277,191
|
|
|
$
|
3.07
|
|
Series Beta convertible preferred stock
|
|
|
2,402,402
|
|
|
|
2,402,402
|
|
|
$
|
3.33
|
|
|
|
2,402,402
|
|
|
|
2,402,402
|
|
|
$
|
3.33
|
|
Series Gamma convertible preferred stock
|
|
|
2,176,616
|
|
|
|
1,997,857
|
|
|
$
|
4.02
|
|
|
|
2,176,616
|
|
|
|
2,023,238
|
|
|
$
|
4.02
|
|
Total
|
|
|
48,947,898
|
|
|
|
46,328,845
|
|
|
|
|
|
|
|
48,947,898
|
|
|
|
46,251,036
|
|
|
|
|
|
In 2017 and 2016, the Company completed several
closings of the Series F convertible preferred stock financing. During 2017 and 2016, the Company issued 103,190 and 5,263,764
shares at for cash proceeds of $410 and $22,198, net of issuance costs, respectively.
The rights, preferences, and privileges of
the Company’s Series A, Series B, Series C, Series D, Series D-1, Series E, Series Alpha, Series Beta, Series Gamma, and
Series F convertible preferred stock are as follows:
Voting Rights
Holders of convertible preferred stock shall
vote equally with the shares of common stock of the Company, and not as a separate class, at any annual or specified meeting of
stockholders of the Company, and may act by written consent in the same manner as the common stock, in either case upon the following
basis: each holder of shares of convertible preferred stock shall be entitled to such number of votes as shall be equal to the
whole number of shares of common stock into which such holder’s aggregate number of shares of convertible preferred stock
are convertible immediately after the close of business on the record date fixed for such meeting or the effective date of such
written consent.
Conversion
Each share of convertible preferred stock
is convertible at the option of the holder, subject to certain anti-dilutive adjustments, for shares of common stock on a one-to-one
ratio. Automatic conversion occurs at the date of a qualified initial public offering covering the offer and sale of common stock
for the account of the Company in which (i) the per share price is at least $21.15 of common stock, and (ii) the gross cash proceeds
to the Company are at least $50 million.
Redemption
The Company’s Series A, Series B, Series
C, Series D, Series D-1, Series E, Series Alpha, Series Beta, Series Gamma and Series F convertible preferred stock is classified
as temporary equity instead of stockholders’ deficit in accordance with authoritative guidance for the classification and
measurement of potentially redeemable securities, as the stock is conditionally redeemable at the holder’s option and upon
certain change-in-control events that are outside the Company’s control, including the liquidation, sale, or transfer of
control of the Company. Upon such change-in-control events, holders of the convertible preferred stock can cause its redemption.
8.
Convertible Preferred Stock
(cont.)
Liquidation Preference
In the event of any liquidation, dissolution,
or winding up of the Company, either voluntary or involuntary, the holders of the Series F preferred stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of all
other Preferred Stock and Common Stock by reason of their ownership of such stock, an amount per share for each share of Preferred
Stock held by them equal to the sum of (i) $4.23 per share and (ii) all declared and unpaid dividends on such share of Preferred
Stock, if any. If upon the liquidation, dissolution, or winding up of the Company, the assets of the Company legally available
for distribution to the holders of the Series F Preferred Stock are insufficient to permit the payment to such holders of the full
amounts specified herein, then the entire assets of the Company legally available for distribution shall be distributed with equal
priority and pro rata among the holders of the Series F Preferred Stock in proportion to the full amounts they would otherwise
be entitled to receive.
After the payment or setting aside for payment
to the holders of Series F Preferred Stock of the full amounts specified, the holders of the Series E preferred stock shall be
entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders
of all other Preferred Stock and Common Stock by reason of their ownership of such stock, an amount per share for each share of
Preferred Stock held by them equal to the sum of (i) $3.07 per share and (ii) all declared and unpaid dividends on such share of
Preferred Stock, if any. If upon the liquidation, dissolution, or winding up of the Company, the assets of the Company legally
available for distribution to the holders of the Series F Preferred Stock are insufficient to permit the payment to such holders
of the full amounts specified herein, then the entire assets of the Company legally available for distribution shall be distributed
with equal priority and pro rata among the holders of the Series F Preferred Stock in proportion to the full amounts they would
otherwise be entitled to receive.
After the payment or setting aside for payment
to the holders of Series F Preferred Stock and Series E Preferred Stock of the full amounts specified, the holders of the Series
A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, and the Series D-1
Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds
of the Company to the holders of the Series Alpha, the Series Beta, and the Series Gamma Preferred Stock and Common Stock by reason
of their ownership of such stock, an amount per share for each share of Preferred Stock held by them equal to the sum of (i) $0.50
per share of Series A Preferred Stock, $0.85 per share of Series B Preferred Stock, $1.15 per share of Series C Preferred Stock,
$2.26 per share of Series D Preferred Stock, and $2.54 per share of Series D-1 Preferred Stock (collectively, the Junior Preferred
Stock) and (ii) all declared and unpaid dividends on such share of Junior Preferred Stock, if any. If upon the liquidation, dissolution,
or winding up of the Company, the assets of the Company legally available for distribution to the holders of the Junior Preferred
Stock are insufficient to permit the payment to such holders of the full amounts specified herein, then the entire assets of the
Company legally available for distribution shall be distributed with equal priority and pro rata among the holders of the Junior
Preferred Stock in proportion to the full amounts they would otherwise be entitled to receive.
After the payment or setting aside for payment
to the holders of Junior Preferred Stock of the full amounts specified, the holders of the Series Alpha Preferred Stock, the Series
Beta Preferred Stock, and the Series Gamma Preferred Stock shall be entitled to receive, prior and in preference to any distribution
of any of the assets or surplus funds of the Company to the holders of Common Stock by reason of their ownership of such stock,
an amount per share for each share of Preferred Stock held by them equal to the sum of (i) $3.07 per share of Series Alpha Preferred
Stock, $3.33 per share of Series Beta Preferred Stock, and $4.02 per share of Series Gamma Preferred Stock and (ii) all declared
and unpaid dividends on such share of Junior Preferred Stock, if any. If upon the liquidation, dissolution, or winding up of the
Company, the assets of the Company legally available for distribution to the holders of the Series Alpha Preferred Stock, the Series
Beta, and the Series Gamma Preferred Stock are insufficient to permit the payment to such holders of the full amounts specified
herein, then the entire assets of the Company legally available for distribution shall be distributed with equal priority and pro
rata among the holders of the Series Alpha Preferred Stock, the Series Beta Preferred Stock, and the Series Gamma Preferred Stock
in proportion to the full amounts they would otherwise be entitled to receive.
After the payment of all the amounts specified
above to the holders of the Preferred Stock, the entire remaining assets of the Company available for distribution shall be distributed
pro rata to the holders of Common Stock, Series F Preferred Stock, and Series E Preferred Stock proportion to the number of shares
of Common Stock held by them, with the shares of Series F Preferred Stock and Series E Preferred Stock being treated as if they
had been converted to shares of Common Stock at the then-applicable conversion rate. The aggregate distribution to the holders
of the Series F Preferred Stock shall not exceed twice the applicable liquidation preference for the Series F Preferred Stock plus
any undeclared but unpaid dividends.
9. Stockholders’ Equity and Stock-Based
Compensation
Common Stock
Total common stock authorized to be issued
as of December 31, 2017 was 75,000,000, with a par value of $0.001 per share. At December 31, 2017 and 2016, there were 7,182,905
and 7,108,459 shares outstanding, respectively.
Preferred Stock Warrants
In 2012, the Company issued a warrant to purchase
an aggregate of 32,388 shares of the Company’s Series D-1 convertible preferred stock with an exercise price of $2.54 per
share to a banking institution with which the Company has a revolving line of credit. The fair value of the warrants, determined
using the Black-Scholes model, was $57, which was recorded as a discount on the related debt and is being amortized to interest
expense over the period of the debt arrangement. In addition, the Company continues to assess the fair value of the preferred stock
warrant on a periodic basis. Changes to the fair value are recorded in interest expense in the consolidated statements of operations
and comprehensive loss, and changes in fair value of the warrant liability are included in accrued expenses on the accompanying
consolidated balance sheet. To value the warrant at inception, the Company assumed volatility of approximately 61%, a term of ten
years, and a 2% risk-free rate of return. These warrants are fully vested. As of December 31, 2017 and 2016, one warrant for 32,388
shares remains outstanding. At December 31, 2017, the Company has reserved 32,388 shares of the Company’s Series D-1 convertible
preferred stock to permit exercise of the outstanding warrant.
Dividends
Dividends are paid on a when-and-if-declared
basis. The Company did not declare any dividends during 2017 or 2016.
Stock Compensation Plan
In 2009, the Company adopted its 2009 Equity
Incentive Plan (the Plan), which allowed for the granting of incentive and non-statutory stock options, as defined by the Internal
Revenue Code, to employees, directors, and consultants. The exercise price of the options granted is generally equal to the value
of the Company’s common stock on the date of grant, as determined by the Company’s Board of Directors. The awards are
exercisable and vest, generally over four years, in accordance with each option agreement. The term of each option is no more than
ten years from the date of the grant. The Plan allows for options to be immediately exercisable, subject to the Company’s
right of repurchase for unvested shares at the original exercise price. The total amount received in exchange for these shares
has been included in accrued expenses on the accompanying consolidated balance sheets and is reclassified to equity as the shares
vest. As of December 31, 2017 and 2016, 48,912 and 29,271 shares were unvested amounting to $12 and $7 in accrued expenses, respectively.
The Plan had 4,209,805 and 657,027 shares of common stock reserved for issuance as of December 31, 2017 and 2016, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation
under provisions which require that share-based payment transactions with employees be recognized in the financial statements based
on their fair value and recognized as compensation expense over the vesting period. The amount of expense recognized during the
period is affected by subjective assumptions, including estimates of the Company’s future volatility, the expected term for
its stock options, the number of options expected to ultimately vest, and the timing of vesting for the Company’s share-based
awards.
9.
Stockholders’ Equity and Stock-Based Compensation
(cont.)
The Company uses a Black-Scholes option-pricing
model to estimate the fair value of its stock option awards. The calculation of the fair value of the awards using the Black-Scholes
option-pricing model is affected by the Company’s stock price on the date of grant as well as assumptions regarding the following:
|
●
|
Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of the award. The Company’s estimated volatility through December 31, 2017, was based on a weighted average of the historical stock volatilities of similar peer companies whose stock prices were publicly available. The calculation of estimated volatility is based in part on historical stock prices of these peer entities over a period equal to the expected life of the awards. The Company continues to use the historical volatility of peer entities as the Company is non-public.
|
|
●
|
The expected term represents the period of time that awards granted are expected to be outstanding. Through December 31, 2017, the Company calculated the expected term using the simplified method as the Company did not have enough historical data to allow for a weighted average term based on historical exercise patterns.
|
|
●
|
The risk-free interest rate is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the stock option award is granted with a maturity equal to the expected term of the stock option award.
|
|
●
|
The assumed dividend yield is based on the Company’s expectation that it will not pay dividends in the foreseeable future.
|
The Company uses historical data to estimate
the number of future stock option forfeitures. Stock-based compensation recorded on the Company’s consolidated statements
of operations and comprehensive loss is based on awards expected to ultimately vest and has been reduced for estimated forfeitures.
The Company’s estimated forfeiture rates may differ from its actual forfeitures, which would affect the amount of expense
recognized during the period.
Valuation of Stock Options
The assumptions used to compute stock-based
compensation costs for the stock options granted during the years ended December 31 are as follows:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average risk-free rate
|
|
|
2.02
|
%
|
|
|
1.39
|
%
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
Weighted average expected life (years)
|
|
|
6.08
|
|
|
|
6.08
|
|
Weighted average volatility
|
|
|
67.70
|
%
|
|
|
67.70
|
%
|
A summary of the Company’s stock option
activity under the Plan and related information is as follows:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding and expected to vest at December 31, 2015
|
|
|
2,614,637
|
|
|
$
|
0.26
|
|
|
|
8.2
|
|
|
$
|
28
|
|
Granted
|
|
|
942,000
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(67,883
|
)
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(816,118
|
)
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest at December 31, 2016
|
|
|
2,672,636
|
|
|
$
|
0.25
|
|
|
|
7.6
|
|
|
$
|
24
|
|
Granted
|
|
|
941,500
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(398,232
|
)
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(116,016
|
)
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
Repurchased
|
|
|
(11,929
|
)
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest at December 31, 2017
|
|
|
3,087,959
|
|
|
$
|
0.25
|
|
|
|
7.2
|
|
|
$
|
53
|
|
Exercisable and expected to vest at December 31, 2016
|
|
|
2,563,044
|
|
|
$
|
0.25
|
|
|
|
7.6
|
|
|
$
|
24
|
|
Exercisable and expected to vest at December 31, 2017
|
|
|
2,979,433
|
|
|
$
|
0.25
|
|
|
|
7.1
|
|
|
$
|
52
|
|
9.
Stockholders’ Equity and Stock-Based Compensation
(cont.)
The weighted average grant-date fair value
of stock options granted during the years ended December 31, 2017 and 2016, was $0.15 and $0.12, respectively. The total fair value
for options vested during the years ended December 31, 2017 and 2016, was $113 and $248, respectively. The aggregate intrinsic
value of options at December 31, 2017 and 2016, is based on the Company’s estimated stock price on that date of $0.24 and
$0.25 per share, respectively. As of December 31, 2017 and 2016, there was $181 and $200 of unrecognized compensation expense,
respectively, for stock options and awards that is expected to be recognized on a straight-line basis over a weighted average period
of approximately 2.7 years and 2.3 years, respectively. There were 116,016 and 67,883 options exercised in 2017 and 2016, respectively,
with an aggregate intrinsic value of $4 and $1, respectively.
Compensation Cost
Compensation cost that has been included on
the Company’s consolidated statements of operations for all stock-based compensation arrangements for the years ended December
31 is detailed as follows:
|
|
Years Ended December 31,
|
|
Stock-based compensation
|
|
2017
|
|
|
2016
|
|
Cost of net revenues
|
|
$
|
23
|
|
|
$
|
39
|
|
Sales and marketing
|
|
|
25
|
|
|
|
26
|
|
General and administrative
|
|
|
42
|
|
|
|
150
|
|
Research and development
|
|
|
28
|
|
|
|
32
|
|
Total
|
|
$
|
118
|
|
|
$
|
247
|
|
10. Income Taxes
Deferred income taxes are recognized for the
tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting
amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the combination of the tax payable for the year and the change during the year in
deferred tax assets and liabilities.
The Company will file a change in accounting
method relating to deferred revenue to adopt Internal Revenue Service Revenue Procedure 2004-34. This change will revise the recognition
of deferred revenue from a cash basis to an approach required under the Revenue Procedure. The net effect of this change is reflected
in both the calculation of the current tax liability and taxes payable as well as the deferred tax balances. The administrative
procedures to formalize this change will be completed as part of the 2017 tax return filings.
For the years ended December 31, 2017 and
2016, the Company had net losses before income taxes of $26.0 million and $16.2 million, respectively. Net losses relating to U.S.
operations for were $25.8 million and $15.2 million, respectively.
The difference between income taxes expected
at the U.S. federal statutory income tax rate of 34% and the reported income tax (benefit) expense are summarized as follows (in
thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Income Tax at Statutory Rate
|
|
$
|
(8,856
|
)
|
|
$
|
(5,519
|
)
|
Valuation allowance
|
|
|
9,376
|
|
|
|
5,886
|
|
State income tax, net of federal benefit
|
|
|
(518
|
)
|
|
|
(367
|
)
|
Business tax credit net of reserves
|
|
|
(224
|
)
|
|
|
(221
|
)
|
Non-deductible expenses
|
|
|
88
|
|
|
|
141
|
|
Foreign income taxes at different rate
|
|
|
46
|
|
|
|
148
|
|
Reported income tax (benefit)/expense
|
|
$
|
(88
|
)
|
|
$
|
68
|
|
Effective tax rate
|
|
|
0.34
|
%
|
|
|
-0.42
|
%
|
10.
Income Taxes
(cont.)
The provision expense (benefit) for income
taxes consists of the following:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
5
|
|
|
|
5
|
|
Foreign
|
|
|
—
|
|
|
|
(31
|
)
|
Total current
|
|
|
5
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(102
|
)
|
|
|
113
|
|
State
|
|
|
9
|
|
|
|
(6
|
)
|
Foreign
|
|
|
—
|
|
|
|
(13
|
)
|
Total deferred
|
|
|
(93
|
)
|
|
|
94
|
|
Total
|
|
$
|
(88
|
)
|
|
$
|
68
|
|
The components of net deferred income taxes
consist of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
19,060
|
|
|
$
|
23,799
|
|
Reserves and accruals
|
|
|
5,405
|
|
|
|
4,297
|
|
Tax credits
|
|
|
763
|
|
|
|
438
|
|
Gross deferred tax assets
|
|
|
25,228
|
|
|
|
28,534
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(25,148
|
)
|
|
|
(28,432
|
)
|
Total deferred tax assets
|
|
|
80
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization of acquired intangibles
|
|
|
(467
|
)
|
|
|
(582
|
)
|
Total deferred tax liabilities
|
|
|
(467
|
)
|
|
|
(582
|
)
|
Net deferred tax liabilities
|
|
$
|
(387
|
)
|
|
$
|
(480
|
)
|
As of December 31, 2017, the Company had net
operating loss carryforwards of approximately $80 million and $29 million for federal and state income tax purposes, respectively.
These net operating losses will begin to expire in 2030, unless previously utilized.
As of December 31, 2017, the Company had R&D
credit carryforwards of approximately $589 and $300 for federal and state income tax purposes, respectively. The federal and Texas
R&D credits will begin to expire in 2034, unless previously utilized. California R&D credits carry forward indefinitely.
Utilization of the net operating losses (NOL)
and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have
occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code (IRC) of 1986, as amended (the
Code), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and tax credit carryforwards
that can be utilized annually to offset future taxable income. In general, an “ownership change” as defined by Section
382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change
of more than 50 percentage points of the outstanding stock of a company by certain stockholders.
10.
Income Taxes
(cont.)
As of December 31, 2017, the Company had not
yet completed its analysis of the deferred tax assets for its NOL and tax credits. The future utilization of the Company’s
net operating loss to offset future taxable income may be subject to an annual limitation under IRC Section 382 as a result of
ownership changes that may have occurred previously or that could occur in the future. The Company has not yet determined whether
such an ownership change has occurred. In order to make this determination, the Company will need to complete an analysis regarding
the limitation of the net operating loss.
The Company has established a full valuation
allowance for its deferred tax assets due to uncertainties that preclude it from determining that it is more likely than not that
the Company will be able to generate sufficient taxable income to realize such assets. The Company monitors positive and negative
factors that may arise in the future as it assesses the need for a valuation allowance against its deferred tax assets. As of December
31, 2017 and 2016, the Company has a valuation allowance of $25,148 and $28,432 respectively, against its deferred tax assets.
The Company accounts for the provisions under
the
Income Taxes
topic of the ASC which addresses accounting for the uncertainty in income taxes. The evaluation of a tax
position in accordance with this topic is a two-step process. The first step involves recognition. The Company determines whether
it is more likely than not that a tax position will be sustained upon tax examination, including resolution of any related appeals
or litigation, based on only the technical merits of the position.
The technical merits of a tax position derive
from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and
their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not
recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement.
A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize
in the financial statements. The tax position is measured as the largest amount of benefit that has a greater than 50% likelihood
of being realized upon ultimate resolution with a taxing authority.
Uncertain tax positions are evaluated based
upon the facts and circumstances that exist at each reporting period. Subsequent changes in judgment based upon new information
may lead to changes in recognition, de-recognition, and measurement. Adjustments may result, for example, upon resolution of an
issue with the taxing authorities, or expiration of a statute of limitations barring an assessment for an issue.
The following is a tabular reconciliation
of the total amounts of unrecognized tax benefits:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Unrecognized tax benefits, beginning of period
|
|
$
|
594
|
|
|
$
|
245
|
|
Tax positions taken in prior periods:
|
|
|
|
|
|
|
|
|
Gross increases
|
|
|
—
|
|
|
|
—
|
|
Gross decreases
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Tax positions taken in current period:
|
|
|
|
|
|
|
|
|
Gross increases
|
|
|
295
|
|
|
|
349
|
|
Settlements
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Lapse of statute of limitations
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, end of period
|
|
$
|
889
|
|
|
$
|
594
|
|
The Company’s practice is to recognize
interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest and penalties
on the consolidated balance sheets and has not recognized interest and/or penalties in the consolidated statements of operations
and comprehensive loss for the years ended December 31, 2017 and 2016.
10.
Income Taxes
(cont.)
The Company is subject to taxation in the
United States and various state jurisdictions. The Company’s tax years from inception are subject to examination by the United
States and state taxing authorities due to the carryforward of unutilized NOLs.
On December 22, 2017, the United States enacted
significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation
Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”)
(previously known as “The Tax Cuts and Jobs Act”). The Tax Act significantly revised the U.S. corporate income tax
regime by, among other things, lowering the corporate tax rate from 35% to 21%. The Tax Act reduced the U.S. corporate income tax
rate from 35% to 21%, effective January 1, 2018. The Company re-measured its deferred tax assets and liabilities as of December
31, 2017, applying the reduced corporate income tax rate and recorded a provisional decrease to the deferred tax assets and liabilities
of $12.7 million, with a corresponding adjustment to the valuation allowance.
Due to the complexity of the Tax Act, the
Company has not finalized the accounting for the effects of the Tax Legislation, including the provisional amounts recorded related
to the transition tax, re-measurement of the deferred taxes and the change to the valuation allowance. The impact of the Tax Legislation
may differ from the Company’s estimate, during the one-year measurement period due to, among other things, further refinement
of the Company’s calculation, changes in interpretations and assumptions the Company has made, and guidance that may be issued
and actions the Company may take as a result of the Tax Legislation.
11. Domestic and Foreign Operations
The Company generates revenue in domestic
and foreign regions. Net revenues attributed to the United States and international geographies are based upon the country in which
the customer is located. The United Kingdom accounted for 14% and 52% of total revenue for the years ended December 31, 2017 and
2016, respectively. Information about these operations is presented below:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net revenues:
|
|
|
|
|
|
|
United States
|
|
$
|
21,343
|
|
|
$
|
19,381
|
|
Europe
|
|
|
3,708
|
|
|
|
24,951
|
|
Other international revenue
|
|
|
1,671
|
|
|
|
3,038
|
|
Total net revenue
|
|
$
|
26,722
|
|
|
$
|
47,370
|
|
Identifiable long-lived assets attributed
to the United States and international geographies are based upon the country in which the asset is located or owned. As of December
31, 2017 and 2016, all of the Company’s identifiable long-lived assets were in the United States.
12. Related-Party Transaction
World Wrestling Entertainment (WWE) is an
investor in the Company’s Series E Preferred Stock and owns a Board observer seat. WWE is also a customer of the Company.
As of December 31, 2017 and 2016, WWE had an accounts receivable balance of $0, with the Company and the Company generated revenues
from WWE of $1,201 and $168 for the years ended December 31, 2017 and 2016, respectively.
On August 26, 2015, the Company entered into
a consulting agreement with Wavemaker Partners III, LP (Wavemaker), an investor, board member and a related party. Wavemaker will
be paid $50 per month for twelve months. The Company recognized consulting expense of $0 and $450 during the years ended December
31, 2017 and 2016, respectively, related to this agreement.
On August 26, 2015, the Company entered into
a consulting agreement with Maxima Capital Management, Inc. (Maxima), a related party. Maxima will be paid $50 for consulting services
per month for twelve months. Maxima has invested in multiple rounds of the Company’s preferred stock financings. The Company
recognized consulting expense $0 and $450 during the years ended December 31, 2017 and 2016, respectively, related to this agreement.
The Company owed Maxima $150 at December 31, 2016, and this balance was subsequently paid.
13. Subsequent Events
The Company has evaluated subsequent events
through April 10, 2018.
From January 1, to January 25, 2018, the Company
received additional subscriptions for Series F convertible preferred stock in the amount of $1,757 at a price of $4.23 per share.
These subscriptions, along with subscriptions received during 2017, caused the Company to close its fifth round of Series F convertible
preferred stock on January 25, 2018 at a price of $4.23 per share for an aggregate price of $5 million. Total shares issued in
the closing were 1,182,015. In conjunction with the sale of preferred stock, 1,182,015 Series F convertible preferred stock warrants
were issued at a strike price of $4.23 per share and other consideration.
From January 26 to April 10, 2018, the Company
received additional subscriptions for Series F convertible preferred stock in the amount of $2,016 at a price of $4.23 per share.
The Company anticipates closing this round sometime in 2018. Once closed, these stockholders will also be issued an equal number
of warrants at an exercise price of $4.23 per share and other consideration.
On February 27, 2018, the Company entered
into an Agreement and Plan of Merger (“Merger Agreement”) with Stellar Acquisition III, Inc. (“Stellar”),
a publicly traded entity on the NASDAQ stock exchange. On the anticipated close date, all shares of the Company’s common
stock, including shares of common stock issuable upon the conversion of shares of all series of convertible preferred stock would
be acquired by Stellar. Subject to adjustments, the Company’s shareholders would be issued shares in Stellar’s successor
(“Successor”), which would be known as Phunware.
The aggregate merger consideration to be paid
pursuant to the Merger Agreement to Phunware stockholders will be an amount equal to: (i) $301 million, plus (ii) the aggregate
cash, cash equivalents and marketable securities of Phunware and its subsidiaries, minus (iii) the aggregate indebtedness of the
Company and its subsidiaries (the “Merger Consideration”) as of the date of the Closing. The merger consideration to
be paid to Phunware stockholders will be paid in the form of number shares of Successor common stock. In addition, each holder
of Phunware common and convertible preferred stock shall be entitled to elect to receive such holder’s pro rata share of
up to an aggregate of 929,890 warrants to purchase shares of Successor common stock that are currently held by The Sponsors.
Should the Merger Agreement be terminated
by Stellar due to a change in recommendation of the Company’s board of directors or after a change in recommendation by the
Company’s board of directors the necessary approval of the merger by the Company’s shareholders was not obtained, a
termination fee of $12 million would be payable to Stellar.
The Merger Agreement states that Stellar will
use good faith efforts to achieve a minimum of $40 million in cash available to the post-transaction company. The Company anticipates
closing the transaction sometime in 2018.
On February 23, 2018, the Company issued a
note receivable to Stellar Acquisition III, Inc. in the amount of $201. The note bears no interest, and is payable the earlier
of (a) the date of consummation of the merger pursuant to terms of the Merger Agreement, (b) the date that Stellar consummates
its initial business combination, or (c) the date of liquidation of Stellar. This note was issued in accordance with the Merger
Agreement.
PHUNWARE, INC. AND
SUBSIDIARIES
Unaudited Condensed
Consolidated Financial Statements
as of September 30, 2018 and December 31, 2017
and for the Nine Months Ended September 30, 2017 and 2018
Phunware,
Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share information)
(Unaudited)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Assets:
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
122
|
|
|
$
|
308
|
|
Accounts receivable, net
|
|
|
4,160
|
|
|
|
6,206
|
|
Prepaid expenses and other current assets
|
|
|
219
|
|
|
|
385
|
|
Note receivable - short term
|
|
|
462
|
|
|
|
—
|
|
Total current assets
|
|
|
4,963
|
|
|
|
6,899
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
80
|
|
|
|
128
|
|
Goodwill
|
|
|
25,846
|
|
|
|
25,886
|
|
Intangible assets, net
|
|
|
604
|
|
|
|
901
|
|
Other assets
|
|
|
187
|
|
|
|
187
|
|
Deferred financing costs
|
|
|
939
|
|
|
|
—
|
|
Total assets
|
|
$
|
32,619
|
|
|
$
|
34,001
|
|
|
|
|
|
|
|
|
|
|
Liabilities, redeemable convertible preferred stock, and stockholders’ deficit
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,938
|
|
|
$
|
3,548
|
|
Accrued expenses
|
|
|
2,960
|
|
|
|
8,796
|
|
Deferred revenue
|
|
|
2,563
|
|
|
|
1,044
|
|
Preferred stock subscription payable
|
|
|
—
|
|
|
|
3,243
|
|
Factored receivables payable
|
|
|
2,071
|
|
|
|
1,816
|
|
Warrant liability
|
|
|
450
|
|
|
|
—
|
|
Total current liabilities
|
|
|
14,982
|
|
|
|
18,447
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
387
|
|
|
|
387
|
|
Deferred revenue
|
|
|
5,589
|
|
|
|
7,165
|
|
Deferred rent
|
|
|
25
|
|
|
|
98
|
|
Total liabilities
|
|
|
20,983
|
|
|
|
26,097
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 6)
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock, $0.001 par value (see Note 8)
|
|
|
116,968
|
|
|
|
107,405
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value (see Note 9)
|
|
|
8
|
|
|
|
7
|
|
Additional paid in capital
|
|
|
3,279
|
|
|
|
2,856
|
|
Accumulated other comprehensive loss
|
|
|
(390
|
)
|
|
|
(347
|
)
|
Accumulated deficit
|
|
|
(108,229
|
)
|
|
|
(102,017
|
)
|
Total stockholders’ deficit
|
|
|
(105,332
|
)
|
|
|
(99,501
|
)
|
Total liabilities, redeemable convertible preferred stock, and stockholders’ deficit
|
|
$
|
32,619
|
|
|
$
|
34,001
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Phunware,
Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands)
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net revenues
|
|
$
|
5,215
|
|
|
$
|
7,427
|
|
|
$
|
24,380
|
|
|
$
|
21,585
|
|
Cost of revenues
|
|
|
2,707
|
|
|
|
3,917
|
|
|
|
8,643
|
|
|
|
12,140
|
|
Gross profit
|
|
|
2,508
|
|
|
|
3,510
|
|
|
|
15,737
|
|
|
|
9,445
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,241
|
|
|
|
2,935
|
|
|
|
4,573
|
|
|
|
8,623
|
|
General and administrative
|
|
|
2,937
|
|
|
|
6,382
|
|
|
|
10,744
|
|
|
|
11,922
|
|
Research and development
|
|
|
1,671
|
|
|
|
2,722
|
|
|
|
5,689
|
|
|
|
8,580
|
|
Total operating expenses
|
|
|
5,849
|
|
|
|
12,039
|
|
|
|
21,006
|
|
|
|
29,125
|
|
Operating loss
|
|
|
(3,341
|
)
|
|
|
(8,529
|
)
|
|
|
(5,269
|
)
|
|
|
(19,680
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(148
|
)
|
|
|
(177
|
)
|
|
|
(533
|
)
|
|
|
(195
|
)
|
Fair value adjustment for warrant liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
(54
|
)
|
|
|
—
|
|
Impairment of digital currencies
|
|
|
—
|
|
|
|
—
|
|
|
|
(334
|
)
|
|
|
—
|
|
Other income (expense)
|
|
|
(31
|
)
|
|
|
(7
|
)
|
|
|
(22
|
)
|
|
|
(2
|
)
|
Total other income (expense)
|
|
|
(179
|
)
|
|
|
(184
|
)
|
|
|
(943
|
)
|
|
|
(197
|
)
|
Loss before taxes
|
|
|
(3,520
|
)
|
|
|
(8,713
|
)
|
|
|
(6,212
|
)
|
|
|
(19,877
|
)
|
Income tax benefit (expense)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
(3,520
|
)
|
|
|
(8,713
|
)
|
|
|
(6,212
|
)
|
|
|
(19,877
|
)
|
Cumulative translation adjustment
|
|
|
(16
|
)
|
|
|
43
|
|
|
|
(43
|
)
|
|
|
117
|
|
Comprehensive loss
|
|
$
|
(3,536
|
)
|
|
$
|
(8,670
|
)
|
|
$
|
(6,255
|
)
|
|
$
|
(19,760
|
)
|
The accompanying notes are an integral
part of these consolidated financial statements.
Phunware,
Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,212
|
)
|
|
$
|
(19,877
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
48
|
|
|
|
138
|
|
Loss on sale of digital currencies
|
|
|
21
|
|
|
|
—
|
|
Bad debt expense
|
|
|
135
|
|
|
|
3,100
|
|
Amortization of acquired intangibles
|
|
|
293
|
|
|
|
973
|
|
Change in fair value of warrants
|
|
|
54
|
|
|
|
—
|
|
Impairment of digital currencies
|
|
|
334
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
285
|
|
|
|
85
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,914
|
|
|
|
(1,875
|
)
|
Prepaid expenses and other assets
|
|
|
166
|
|
|
|
20
|
|
Accounts payable
|
|
|
3,391
|
|
|
|
(1,636
|
)
|
Accrued expenses
|
|
|
(5,872
|
)
|
|
|
2,598
|
|
Deferred revenue
|
|
|
(57
|
)
|
|
|
2,585
|
|
Net cash used by operating activities
|
|
|
(5,500
|
)
|
|
|
(13,889
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Proceeds received from sale of digital currencies
|
|
|
913
|
|
|
|
—
|
|
Payments for note receivable
|
|
|
(462
|
)
|
|
|
—
|
|
Capital expenditures
|
|
|
—
|
|
|
|
(27
|
)
|
Net cash provided by (used for) investing activities
|
|
|
451
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Payment on capital lease obligation
|
|
|
—
|
|
|
|
(81
|
)
|
Net proceeds from factoring agreement
|
|
|
255
|
|
|
|
1,731
|
|
Proceeds from exercise of options to purchase common stock
|
|
|
139
|
|
|
|
8
|
|
Proceeds from preferred stock subscriptions
|
|
|
5,489
|
|
|
|
440
|
|
Convertible preferred stock issuance costs
|
|
|
(41
|
)
|
|
|
(17
|
)
|
Deferred financing costs
|
|
|
(939
|
)
|
|
|
—
|
|
Net cash provided for financing activities
|
|
|
4,903
|
|
|
|
2,081
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash
|
|
|
(40
|
)
|
|
|
79
|
|
Net decrease in cash
|
|
|
(186
|
)
|
|
|
(11,756
|
)
|
Cash at the beginning of the period
|
|
|
308
|
|
|
|
12,629
|
|
Cash at the end of the period
|
|
$
|
122
|
|
|
$
|
873
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
534
|
|
|
$
|
167
|
|
Series F preferred stock issuances from subscription payable, net of fair value of Series F preferred stock warrants issued
|
|
$
|
9,604
|
|
|
$
|
—
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Phunware,
Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except
share and per share information)
1. The Company and Basis of Presentation
The Company
Phunware, Inc. (the “Company”)
is a provider of Multiscreen as a Service (MaaS) solutions, an integrated customer engagement platform that enables organizations
to develop customized, immersive, branded mobile applications. The Company sells its services in vertical markets, including health
care, retail, hospitality, transportation, sports, and entertainment. The Company enables brands to engage, manage, and monetize
their anytime-anywhere mobile users. The Company’s MaaS technology is available in software development kit form for organizations
developing their own application, via customized development services, and prepackaged solutions. Through its integrated mobile
advertising platform of publishers and developers, the Company also maximizes mobile monetization through an advertising product
suite including self-service media buying, real-time bidding, publisher mediation and yield optimization, cross-platform ad creation,
and dynamic ad serving. Founded in 2009, the Company is a Delaware corporation headquartered in Austin, Texas.
On February 27, 2018, the Company entered
into an Agreement and Plan of Merger (“Merger Agreement”) with Stellar Acquisition III, Inc. (“Stellar”),
a publicly traded entity on the NASDAQ stock exchange. On the anticipated close date, all shares of the Company’s common
stock, including shares of common stock issuable upon the conversion of shares of all series of convertible preferred stock would
be acquired by Stellar. Subject to adjustments, the Company’s shareholders would be issued shares in Stellar’s successor
(“Successor”), which would be known as Phunware.
The aggregate merger consideration to be paid pursuant to the
Merger Agreement to Phunware stockholders will be an amount equal to: (i) $301 million, plus (ii) the aggregate cash, cash equivalents
and marketable securities of Phunware and its subsidiaries, minus (iii) the aggregate indebtedness of the Company and its subsidiaries
(the “Merger Consideration”) as of the date of the Closing. The merger consideration to be paid to Phunware stockholders
will be paid in the form of number shares of Successor common stock. In addition, each holder of Phunware common and convertible
preferred stock shall be entitled to elect to receive such holder’s pro rata share of up to an aggregate of 929,890 warrants
(the “Transfer Sponsor Warrants”) to purchase shares of Successor common stock that are currently held by certain shareholders
of Stellar. Should not all of Phunware shareholders elect to receive warrants, those electing to do so may elect to receive their
pro rata share of warrants that were not initially elected. The Merger Agreement states that Stellar will use good faith efforts
to achieve a minimum of $40 million in cash available to the post-transaction company. The Company anticipates closing the transaction
sometime in 2018.
The number of warrants available to Phunware shareholders to
elect to receive as consideration and the $40 million minimum cash requirement was subsequently amended. See Note 11 for further
discussion.
Basis of Presentation
The consolidated financial statements have
been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP), and include the Company’s accounts
and those of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
The balance sheet at December 31, 2017 was
derived from the Company’s audited consolidated financial statements, but these interim consolidated financial statements
do not include all the annual disclosures required by GAAP. These condensed interim consolidated financial statements should be
read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended
December 31, 2017, which are referenced herein. The accompanying interim consolidated financial statements as of September 30,
2018 and for the three and nine months ended September 30, 2018 and 2017, are unaudited. The unaudited interim financial statements
have been prepared on a basis consistent with the audited financial statements, pursuant to the rules and regulations of the SEC
for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared
in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the
financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to fairly state
the Company’s financial position as of September 30, 2018 and the results of operations for the three and nine months ended
September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017. The results for the nine months
ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or
for any future interim period.
As of December 31, 2016, we adopted the
provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 205-40, Presentation of
Financial Statements - Going Concern (ASC 205-40), which requires management to assess our ability to continue as a going concern
for one year after the date the financial statements are issued. Under ASC 205-40, management has the responsibility to evaluate
whether conditions and/or events raise substantial doubt about our ability to meet our future financial obligations as they become
due within one year after the date that the financial statements are issued. As required by this standard, management’s evaluation
shall initially not take into consideration the potential mitigating effects of management’s plans that have not been fully
implemented as of the date the financial statements are issued. We have concluded there is substantial doubt about our ability
to continue as a going concern through one year from the issuance of these financial statements.
The accompanying consolidated financial
statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The accompanying consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities
that may result from uncertainty related to our ability to continue as a going concern.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts in
the Company’s consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Items subject to the use of estimates include revenue recognition for contract completion, useful lives of long-lived assets including
intangibles, valuation of intangible assets acquired in business combinations, reserves and certain accrued liabilities, determination
of the provision for income taxes, and fair value of equity instruments.
Revenue Recognition
Revenue is recognized when all four of the
following criteria are met:
|
●
|
Persuasive evidence of an arrangement exists;
|
|
●
|
The service has been completed or services are actively being provided to the customer;
|
|
●
|
The amount of fees to be paid by the customer is fixed or determinable; and
|
|
●
|
The collection of fees is reasonably assured.
|
Platform Subscriptions and Services Revenue
The Company derives subscription revenue
from software license fees, which comprise subscription fees from customers licensing the Company’s 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.
These application development, license and
support fee arrangements represent software arrangements that are accounted for pursuant to the software revenue recognition guidance
of Accounting Standards Codification Topic (ASC) 985-605,
Software — Revenue Recognition
.
The Company typically receives 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 the Company to provide PCS over a fixed term. The Company is 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, the Company recognizes 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, the Company also provides
professional services by outsourcing employees’ time and materials to customers. Such amounts are typically recorded as the
services are delivered.
Application Transaction Revenue
The Company also generates revenue by charging
advertisers to deliver advertisements (ads) to users of mobile connected devices. Depending on the specific terms of each advertising
contract, the Company generally recognizes 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
the Company recognizes revenue at the time the user views, clicks, or otherwise acts on the ad. The Company sells ads through several
offerings: cost per thousand impressions, on which advertisers are charged for each ad delivered to 1,000 consumers; cost per click,
on which advertisers are charged for each ad clicked or touched on by a user; and cost per action, on which advertisers are charged
each time a consumer takes a specified action, such as downloading an app. In addition, the Company generates 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.
In the normal course of business, the Company
acts as an intermediary in executing transactions with third parties. The determination of whether revenue should be reported on
a gross or net basis is based on an assessment of whether the Company is acting as the principal or an agent in its transactions
with advertisers. The determination of whether the Company is acting as a principal or an agent in a transaction involves judgment
and is based on an evaluation of the terms of each arrangement. While none of the factors individually are considered presumptive
or determinative in reaching a conclusion on gross versus net revenue recognition, the Company places the most weight on the analysis
of whether it is the primary obligor in the arrangement. To date, the Company has determined that it is the primary obligor in
all advertising arrangements because it is responsible for identifying and contracting with third-party advertisers, which include
both advertising agencies or companies; establishing the selling prices of the advertisements sold; performing all billing and
collection activities, including retaining credit risk; and bearing sole responsibility for the suitability and fulfillment of
the advertising. Accordingly, the Company acts as the principal in all advertising arrangements and therefore reports revenue earned
and costs incurred related to these transactions on a gross basis.
The Company records deferred revenue when
it receives cash payments from advertiser clients in advance of when the services are performed under the arrangements with the
customer. The Company recognizes deferred revenue as revenue only when the revenue recognition criteria are met.
Concentrations of Credit Risk
The Company’s financial instruments
that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable. Although the Company
limits its exposure to credit loss by depositing its cash with established financial institutions that management believes have
good credit ratings and represent minimal risk of loss of principal, its deposits, at times, may exceed federally insured limits.
Collateral is not required for accounts receivable, and the Company believes the carrying value approximates fair value.
The following schedule sets forth the Company’s
concentration of revenue sources as a percentage of total net revenues.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Customer A
|
|
|
60
|
%
|
|
|
55
|
%
|
|
|
39
|
%
|
|
|
40
|
%
|
Customer B
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
26
|
%
|
|
|
17
|
%
|
Customer C
|
|
|
0
|
%
|
|
|
10
|
%
|
|
|
0
|
%
|
|
|
5
|
%
|
The following schedule sets forth the concentration
of accounts receivable, net of specific allowances for doubtful accounts.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Customer A
|
|
|
51
|
%
|
|
|
24
|
%
|
Customer D
|
|
|
16
|
%
|
|
|
1
|
%
|
Cash
The Company considers all investments with
a maturity of three months or less from the date of acquisition to be cash equivalents. The Company had no cash equivalents at
September 30, 2018.
Accounts Receivable and Reserves
Accounts receivable are presented net of
allowances. The Company considers receivables past due based on the contractual payment terms. The Company makes judgments as to
its ability to collect outstanding receivables and records a bad debt allowance for receivables when collection becomes doubtful.
The allowances are based upon historical loss patterns, current and prior trends in its aged receivables, credit memo activity,
and specific circumstances of individual receivable balances. Accounts receivable consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Accounts receivable
|
|
$
|
7,403
|
|
|
$
|
9,295
|
|
Less allowances for doubtful accounts
|
|
|
(3,243
|
)
|
|
|
(3,089
|
)
|
Balance
|
|
$
|
4,160
|
|
|
$
|
6,206
|
|
The Company recognized $67 and $135 in bad
debt expense for the three and nine months ended September 30, 2018, respectively. The Company recognized $3,100 in bad debt expense
for the three and nine months ended September 30, 2017.
Digital Currencies
In 2018, the Company began accepting cryptocurrency-denominated
assets (“cryptocurrencies” or “digital currencies”) such as Bitcoin and Ethereum as investment into its
Series F convertible preferred stock. The investments were valued at the time the digital currency was received in the Company’s
digital “wallet”. During 2018, total investment in Series F convertible preferred stock by way of cryptocurrencies
was $1,268.
In accordance with ASC 350-30, Intangibles
Other than Goodwill, the Company will test for impairment of its digital currencies at least annually and more frequently if events
or changes in circumstances indicate that it is more likely than not that the digital currency asset is impaired. We test for impairment
by comparing our carrying value of digital currencies with the value traded on an exchange. We recognize decreases in the value
of these assets caused by market declines. In accordance with authoritative guidance, subsequent reversals of previously recognized
impairment loss is not permitted. Such changes in fair value of our cryptocurrencies are recorded in other income (expense) in
our consolidated statements of operations and comprehensive income (loss). The Company previously recorded an impairment charge
of $334 during the second quarter of 2018.
Gains and losses realized upon sale of cryptocurrencies
are also recorded in other income (expense) in our consolidated statements of operations and comprehensive loss. The Company sold
its remaining holdings in cryptocurrencies during the third quarter of 2018. Realized losses on sales of digital currencies were
$31 and $21 for the three and nine months ended September 30, 2018, respectively.
Deferred Merger Costs
As of September 30, 2018, deferred merger
costs included $939 paid to or invoiced by various service providers for its public offering. If the Company successfully completes
the public offering, these prepaid expenses will be reclassified to stockholders’ equity.
Long-Lived Assets
In accordance with authoritative guidance,
the Company periodically re-evaluates the original assumptions and rationale utilized in the establishment of the carrying value
and estimated lives of all of its long-lived assets, including property and equipment. The determinants used for this evaluation
include management’s estimate of the asset’s ability to generate positive income from operations and positive cash
flow in future periods as well as the strategic significance of the asset to the Company’s business objective. The Company
did not recognize any impairment losses during the three and nine months ended September 30, 2018 or 2017.
Deferred Revenue
The Company’s deferred revenue balance
consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Deferred revenue (current)
|
|
|
|
|
|
|
Platform subscriptions and services revenue
|
|
$
|
1,636
|
|
|
$
|
910
|
|
Application transaction revenue
|
|
|
342
|
|
|
|
134
|
|
PhunCoin deposits
|
|
|
585
|
|
|
|
—
|
|
Total deferred revenue (current)
|
|
$
|
2,563
|
|
|
$
|
1,044
|
|
Deferred revenue (non-current)
|
|
|
|
|
|
|
|
|
Platform subscriptions and services revenue
|
|
$
|
5,589
|
|
|
$
|
7,165
|
|
Total deferred revenue (non-current)
|
|
$
|
5,589
|
|
|
$
|
7,165
|
|
Total deferred revenue
|
|
$
|
8,152
|
|
|
$
|
8,209
|
|
Fair Value of Financial Instruments
Authoritative guidance on fair value measurements
defines fair value, establishes a consistent framework for measuring fair value, and expands disclosures for each major asset and
liability category measured at fair value on either a recurring or non-recurring basis. Fair value is an exit price representing
the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would
use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 — Observable inputs such as
quoted prices in active markets.
Level 2 — Inputs, other than the quoted
prices in active markets, that are observable either directly or indirectly.
Level 3 — Unobservable inputs in which
there is little or no market data, which require the reporting entity to develop its own assumptions.
The fair value hierarchy also requires an
entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The carrying value of accounts receivable,
prepaid expenses, other current assets, accounts payable, and accrued expenses are considered to be representative of their respective
fair values because of the short-term nature of those instruments.
The fair value of the Company’s Series
F convertible preferred stock warrants at September 30, 2018 was $450 and is presented as a liability on the accompanying consolidated
balance sheets and is considered a Level 3 fair value measurement as there are significant unobservable inputs used in the underlying
valuations. The fair value measurements of the Series F convertible preferred stock warrants are sensitive to changes in the unobservable
inputs. Changes in those inputs might result in a higher or lower fair value measurement. There were no Series F convertible preferred
stock warrants outstanding as of December 31, 2017.
Recent Accounting Pronouncements
In May 2014, the FASB and the International
Accounting Standards Board jointly issued Accounting Standards Update No. (ASU) 2014-09,
Revenue from Contracts with Customers
,
which supersedes the revenue recognition requirements in ASC 605,
Revenue Recognition
. ASU 2014-09 is a comprehensive new
revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP and International
Financial Reporting Standards. The standard’s core principle is that a company will recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange
for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current authoritative
guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration
to include in the transaction price, and allocating the transaction price to each separate performance obligation.
This standard is effective for public entities
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. There is a one-year deferral
for non-public companies, but some companies that consider themselves private may have to follow the public company effective date
if they meet certain requirements. Early adoption is not permitted under U.S. GAAP, but non-public companies may adopt the new
standard as of the public entity effective date. This standard will impact those arrangements historically accounted for under
ASC 985-605. VSOE of fair value is not a requirement for separation under the new standard. As a result, certain amounts required
to be deferred under ASC 985-605 may be recognized as revenue sooner. The Company has 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 Company
will adopt the new standard effective January 1, 2019. The Company is currently evaluating the financial statement impact, if any,
of the new revenue recognition standard on its consolidated financial statements.
In November 2015, the FASB issued ASU No.
2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
, which eliminates the current requirement
for organizations to present deferred tax liabilities and assets as current and non-current in a classified balance sheet. Instead,
organizations will be required to classify all deferred tax assets and liabilities as non-current. ASU 2015-17 is effective for
consolidated financial statements issued for annual periods beginning after December 15, 2017. The amendments may be applied prospectively
to all deferred tax liabilities and assets or retrospectively to all periods presented. Effective January 1, 2018, the Company
is adopting this guidance. There was no material impact to the consolidated financial statements.
In February 2016, the FASB issued ASU No.
2016-02,
Leases
(Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities
that arise from leases. For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially
measured at the present value of the lease payments, in the statement of financial position. For leases with a term of 12 months
or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets
and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous generally accepted
accounting principles. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. Earlier application is permitted. In transition, lessees and lessors are required to recognize and measure leases
at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating
the effect that the adoption of this ASU will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The amendment
simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits
and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees’
maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are
expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for
the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted
in any interim or annual period. The Company has adopted this guidance in the first quarter of 2018 and elected to recognize forfeitures
as they occur using the modified retrospective basis. The adoption of this standard was immaterial to the consolidated financial
statements.
In May 2017, the FASB issued ASU 2017-09,
Compensation—Stock Compensation: Scope of Modification Accounting, to increase comparability and provide clarity on whether
changes in the terms or conditions in a share-based payment award require a reporting entity to apply modification guidance per
FASB ASC Topic 718. The new guidance is to be applied on a prospective basis, is effective for the annual and interim periods beginning
after December 15, 2017 and early adoption is permitted. The Company adopted this guidance in 2018 and it did not have any impact
on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement, which
eliminates disclosure requirement regarding transfers between level 1 and level 2 of the fair value of hierarchy, however, adds
disclosure requirements on the range and weighted average used to develop significant unobservable inputs for level 3 fair value
measurements. The guidance is effective for fiscal years beginning after December 15, 2019. The Company expects the impact of the
adoption of this standard on its consolidated financial statements to be immaterial.
3. Note Receivable
During 2018, the Company has issued multiple
notes receivable to Stellar Acquisition III, Inc. in the aggregate amount of $462. The notes bear no interest and are payable the
earlier of (a) the date of consummation of the merger pursuant to terms of the Merger Agreement, (b) the date that Stellar consummates
its initial business combination, or (c) the date of liquidation of Stellar. The notes were issued in accordance with the Merger
Agreement.
4. Accrued Expenses
Accrued expenses consist of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Partner revenue share
|
|
$
|
199
|
|
|
$
|
6,522
|
|
Payroll and related
|
|
|
2,402
|
|
|
|
1,545
|
|
Taxes
|
|
|
138
|
|
|
|
118
|
|
Other
|
|
|
221
|
|
|
|
611
|
|
Total accrued expenses
|
|
$
|
2,960
|
|
|
$
|
8,796
|
|
In April 2018, an application transaction
partner agreed to release the Company from its liability to them in the amount of $6,322. This amount had previously been recorded
as a reduction in revenue of $2,907 and $3,415 for the years ended December 31, 2017 and 2016, respectively. The Company has recognized
as revenue $6,322 related to the release of this liability during the second quarter of 2018.
5. Factoring Agreement
On June 15, 2016 the Company entered into
a factoring agreement with CSNK Working Capital Finance Corp. (d/b/a Bay View Funding) (“Bay View”) whereby it sells
select accounts receivable with recourse.
Under the terms of the agreement, Bay View
may make advances to the Company of amounts representing up to 80% of the net amount of eligible accounts receivable. The factor
facility was collateralized by a general security agreement over all the Company’s personal property and interests. Fees
paid to Bay View for factored receivables are 1.80% for the first 30 days and is and 0.65% for every ten days thereafter, to a
maximum of 90 days total outstanding. The Company bears the risk of credit loss on the receivables. These receivables are accounted
for as a secured borrowing arrangement and not as a sale of financial assets.
Factor expense is recorded as interest expense
in the consolidated statement of operations and comprehensive loss.
Factor expense for the three and nine months
ended September 30 is as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Factoring expense
|
|
$
|
147
|
|
|
$
|
175
|
|
|
$
|
528
|
|
|
$
|
189
|
|
The amount of the factored receivables outstanding
was $2,071 and $1,816 as of September 30, 2018 and December 31, 2017, respectively. There was $929 available for future advances
as of September 30, 2018.
6. Commitments and Contingencies
Leases
The Company has operating leases for office
space in Austin, Texas; Newport Beach, California; San Diego, California; and Miami, Florida. Rent expense under operating leases
totaled $174 and $158 for the three months ended September 30, 2018 and 2017, respectively and $479 and $477 for the nine months
ended September 30, 2018 and 2017, respectively.
Future minimum annual lease payments under
the Company’s operating leases are as follows;
|
|
Lease
obligations
|
|
Future minimum lease obligations Years ended December 31,
|
|
|
|
2018 (Remainder)
|
|
$
|
180
|
|
2019
|
|
|
631
|
|
2020
|
|
|
167
|
|
2021
|
|
|
121
|
|
2022
|
|
|
126
|
|
Thereafter
|
|
|
64
|
|
Total
|
|
$
|
1,289
|
|
Litigation
On September 26, 2017, we filed a breach
of contract complaint against Uber Technologies, Inc. (“Uber”) seeking approximately $3 million (plus interest) for
unpaid invoices for advertising campaign services provided for Uber in the first quarter of 2017. On November 13, 2017, Uber generally
denied the allegations in our complaint and also filed a cross-complaint against us and Fetch Media, Ltd. (“Fetch”)
— the advertising agency Uber retained to run its mobile advertising campaign for the period 2014 through the first quarter
of 2017 (the “Fetch Campaign”), asserting numerous fraud and contract-based claims. All the claims stem from Uber’s
assertion that Fetch and/or the Company (and/or other-as-yet-unidentified ad networks and publishers) are liable for the fraud-infested
Fetch Campaign, under which Uber overpaid Fetch and mobile advertising providers due to fraudulent attribution for installments
of the Uber application. Uber does not allege any specific dollar amount that it is seeking in damages against either of the named
cross-defendants (Fetch and Phunware). We filed a motion to dismiss the cross-complaint, which was heard on February 7, 2018. The
motion was granted in part and denied in part by the Court. On April 16, 2018, the action was designated complex, and the matter
has been assigned for all purposes to Judge Wiss of the Superior Court of California, San Francisco County (Department 305). The
parties are currently engaged in discovery, including depositions. The Court has set a trial date of April 29, 2019. The Company
has maintained that our claims against Uber are meritorious and that Uber’s claims against us are not. However, we make no
predictions on the likelihood of success of prevailing on our contract action against Uber or on the likelihood of defeating Uber’s
claims against us. The Company recorded as bad debt expense $3,089 for the unpaid invoices alleged in this lawsuit for the year
ended December 31, 2017, and this amount remains in allowance for doubtful accounts as of September 30, 2018 and December 31, 2017.
On September 8, 2017, the Company and Greater
Houston Convention and Visitors Bureau (“GHCVB”) initiated litigation in a breach of contract dispute. The dispute
concerned an October 2016 agreement for the Company to develop a mobile application and advertising campaign for GHCVB. The dispute
concerns an October 2016 agreement for us to develop a mobile application and advertising campaign for GHCVB. In April 2018, the
parties mediated this dispute with the assistance of a private mediator. The mediation was successful and Phunware was awarded
$485, which was paid to the Company in April 2018. Each side was responsible for their own attorneys’ fees. The $485 settlement
was recorded in net revenue in the second quarter of 2018.
From time to time, the Company is and may
become involved in various legal proceedings in the ordinary course of business. The outcomes of our legal proceedings are inherently
unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular
reporting period. In addition, for the matters disclosed above that do not include an estimate of the amount of loss or range of
losses, such an estimate is not possible, and we may be unable to estimate the possible loss or range of losses that could potentially
result from the application of non-monetary remedies.
Legal fees associated with loss contingencies
are expensed as incurred.
7. PhunCoin
In June 2018, PhunCoin, Inc., the Company’s
wholly-owned subsidiary, launched an offering pursuant to Rule 506(c) of Regulation D as promulgated under the Securities Act of
rights (the “Rights”) to acquire PhunCoin (the “Token”).
PhunCoin, Inc. accepts payment in the form
of cash and digital currencies for purchases of the Rights. PhunCoin, Inc. plans to sell between $10 million and $100 million of
the Rights, which will entitle the Rights holders to receive between approximately 8 billion and 30.5 billion of PhunCoin. The
amount of PhunCoin to be issued to the purchaser is equal to the dollar amount paid by the purchaser divided by the price of the
PhunCoin at the time of issuance of the PhunCoin during the Token Generation Event (as defined below) before taking into consideration
an applicable discount rate, which is based on the time of the purchase, (early purchasers will receive a larger discount rate).
The rights, privileges, and obligations
of Rights holders are set forth as follows:
Issuance of PhunCoin Tokens
The PhunCoin is expected to be issued to
Rights holders the earlier of (i) the launch of PhunCoin’s, Inc.’s blockchain technology enabled rewards marketplace
and data exchange (“Token Generation Event”), (ii) one (1) year after the issuance of the Rights to the purchaser,
or (iii) the date PhunCoin, Inc. determines that it has the ability to enforce resale restrictions with respect to PhunCoin pursuant
to applicable federal securities laws. Proceeds from the Rights offering are generally not refundable if the Token Generation Event
is not consummated; however, the Company believes PhunCoin, Inc. has a contractual obligation to use good faith efforts to issue
a Token to Rights holders under the Token Rights Agreement.
Termination of the Token Rights Agreement
Termination of the Token Rights Agreement
occurs on the earlier of (i) PhunCoin being issued to the Rights holder pursuant to the provisions noted above, (ii) the payment,
or setting aside of payment with respect to a dissolution event (as described below), or (iii) twelve months from the date of the
Token Rights Agreement with the Rights holder, which PhunCoin, Inc. may extend at its sole discretion if a Token Generation Event
has not occurred. Upon termination of the Token Rights Agreement, PhunCoin, Inc. has no further obligation to the Rights holder.
Dissolution Event
A dissolution event occurs if there has
been (i) a voluntary termination of PhunCoin, Inc.’s operations, (ii) a general assignment for the benefit of PhunCoin, Inc.’s
creditors, (iii) a change of U.S. laws that make the use or issuance of PhunCoin or the Token Generation Event impractical or unfeasible,
or (iv) any other liquidation, dissolution or winding up of PhunCoin, Inc.
In the event a dissolution event occurs
prior to the termination of the Token Rights Agreement, if there are any remaining proceeds from the Rights offering that have
not been utilized by PhunCoin, Inc.in its operations or for the development of the PhunCoin Ecosystem, such remaining proceeds
would be distributed pro rata to purchasers in the Rights offering following any distributions to holders of PhunCoin, Inc.’s
capital stock or debt, if any.
No Voting Rights or Profit Share
Rights holders, (and eventual PhunCoin holders)
have no voting rights and are not entitled to share in the profits or residual interest of Phunware, PhunCoin, Inc. or any subsidiaries
of the Company.
Through September 30, 2018, the Company
received cash proceeds from its Rights offering of $585, pursuant to which the holders of the Rights will receive an aggregate
of approximately 277.9 million PhunCoin if the Token Generation Event occurs. The Company recorded proceeds from the Rights sale
as current deferred revenue in its consolidated balance sheet.
8. Preferred Stock
Convertible Preferred Stock
During 2018, the Company received subscriptions
for Series F convertible preferred stock in the amount of $6,757 at a price of $4.23 per share, which included $5,489 in cash proceeds
and $1,268 in digital currencies. These subscriptions, along with subscriptions received during 2017, caused the Company to close
its fifth and sixth round of Series F convertible preferred stock on January 25, 2018 and June 7, 2018, respectively, at a price
of $4.23 per share for an aggregate price of $10,000. Total shares issued in the closing were 2,364,045. In conjunction with the
sale of convertible preferred stock, 2,364,045 Series F convertible preferred stock warrants were issued at a price of $4.23 per
share and other consideration.
The following table summarizes the Company’s
convertible preferred stock authorized, issued, and outstanding as of September 30, 2018.
|
|
Shares Authorized
|
|
|
Shares Issued and Outstanding
|
|
|
Liquidation Preference per Share
|
|
|
Liquidation Preference
|
|
|
Common Stock Equivalent
|
|
Series A convertible preferred stock
|
|
|
3,169,089
|
|
|
|
3,169,089
|
|
|
$
|
0.50
|
|
|
$
|
1,585
|
|
|
|
3,169,089
|
|
Series B convertible preferred stock
|
|
|
2,011,990
|
|
|
|
2,011,990
|
|
|
$
|
0.85
|
|
|
|
1,710
|
|
|
|
2,011,990
|
|
Series C convertible preferred stock
|
|
|
5,223,742
|
|
|
|
5,223,742
|
|
|
$
|
1.15
|
|
|
|
6,000
|
|
|
|
5,223,742
|
|
Series D convertible preferred stock
|
|
|
3,709,078
|
|
|
|
3,709,078
|
|
|
$
|
2.26
|
|
|
|
8,383
|
|
|
|
3,709,078
|
|
Series D-1 convertible preferred stock
|
|
|
4,757,261
|
|
|
|
4,724,873
|
|
|
$
|
2.54
|
|
|
|
11,996
|
|
|
|
4,724,873
|
|
Series E convertible preferred stock
|
|
|
10,097,720
|
|
|
|
10,097,720
|
|
|
$
|
3.07
|
|
|
|
31,000
|
|
|
|
10,097,720
|
|
Series F convertible preferred stock
|
|
|
14,442,993
|
|
|
|
12,078,948
|
|
|
$
|
4.23
|
|
|
|
51,094
|
|
|
|
12,078,948
|
|
Series Alpha convertible preferred stock
|
|
|
3,400,000
|
|
|
|
3,277,159
|
|
|
$
|
3.07
|
|
|
|
10,061
|
|
|
|
3,277,159
|
|
Series Beta convertible preferred stock
|
|
|
2,402,402
|
|
|
|
2,402,402
|
|
|
$
|
3.33
|
|
|
|
8,000
|
|
|
|
2,402,402
|
|
Series Gamma convertible preferred stock
|
|
|
2,176,616
|
|
|
|
1,997,857
|
|
|
$
|
4.02
|
|
|
|
8,031
|
|
|
|
1,997,857
|
|
Total
|
|
|
51,390,891
|
|
|
|
48,692,858
|
|
|
|
|
|
|
$
|
137,860
|
|
|
|
48,692,858
|
|
The rights, preferences, and privileges
of the Company’s Series A, Series B, Series C, Series D, Series D-1, Series E, Series Alpha, Series Beta, Series Gamma, and
Series F convertible preferred stock are disclosed in the footnotes of the audited financial statements.
Preferred Stock Warrants
In 2012, the Company issued a warrant to
purchase an aggregate of 32,388 shares of the Company’s Series D-1 convertible preferred stock with an exercise price of
$2.54 per share to a banking institution with which the Company has a revolving line of credit. The fair value of the warrants,
determined using the Black-Scholes model, was $57, which was recorded as a discount on the related debt and is being amortized
to interest expense over the period of the debt arrangement. To value the warrant at inception, the Company assumed volatility
of approximately 61%, a term of ten years, and a 2% risk-free rate of return. These warrants are fully vested. As of September
30, 2018, and December 31, 2017, one warrant for 32,388 shares remains outstanding. The fair value of this warrant was $0 at September
30, 2018 and December 31, 2017. At September 30, 2018, the Company has 32,388 shares of the Company’s Series D-1 convertible
preferred stock reserved to permit exercise of the outstanding warrant.
During 2018, the Company issued warrants
to purchase an aggregate 2,364,045 shares of the Company’s Series F convertible preferred stock with an exercise price of
$4.23 per share to certain investors in the Company’s Series F convertible preferred stock financing. The term of the Series
F Warrants is the earlier of (i) the fifth anniversary of the date of issuance, (ii) an acquisition, merger, or consolidation of
the Company or a sale, lease or other disposition of all or substantially all of the assets of Phunware and its subsidiaries, except
(a) any sale of stock for capital raising purposes, (b) purpose of changing the Company’s state of incorporation, and (c)
where the shareholders of Phunware immediately before such transaction retain at least a majority of the voting power immediately
following such transaction; or (iii) immediately prior to an initial public offering. These warrants are fully vested.
The fair value of the warrants was determined
using the probability-weighted expected return method at the time of each Series F convertible preferred stock close date. The
probability-weighted expected return method is based on an estimate of expected fair value as analyzed through various liquidity
scenarios. Fair value is determined for a given scenario at the time of the future liquidity event and discounted back to the valuation
date using a risk-adjusted discount rate. To determine fair value, the present values, under each scenario are weighted based on
the expected probability of each scenario occurring. The fair value of the warrants at time of issuance, determined using the probability-weighted
expected return method, was $396, at time of issuance, which was recorded as a reduction to the Series F convertible preferred
stock. In addition, the Company continues to assess the fair value of the Series F convertible preferred stock warrants on a periodic
basis. Changes to the fair value are recorded in other income (expense) in the consolidated statements of operations and comprehensive
income (loss), and the fair value of the warrant liability is included in warrant liability on the accompanying consolidated balance
sheets. The Company recorded $0 and $54 as a change in fair value of these warrants for the three and nine months ended September
30, 2018, respectively. As of September 30, 2018, warrants for an aggregate of 2,364,045 Series F convertible preferred shares
remains outstanding, for which the Company has reserved this number of shares to permit the exercise of the warrants.
Series F PhunCoin Warrant
Investors in the fifth and sixth rounds
of Series F convertible preferred stock were issued warrants to receive an aggregate of approximately 27.4 billion PhunCoins to
sixty-eight (68) Series F convertible preferred stockholders. Should the Company complete a Token Generation Event, the Series
F convertible preferred stockholders would receive their requisite amount of PhunCoin. The Company believes there is no traditional
“exercise period” or ‘term” as with other typical embedded features, and the PhunCoin warrants issued in
conjunction with the Series F convertible preferred stock lack characteristics of financial instruments and derivatives. In addition,
the PhunCoin warrants do not obligate the Company to achieve the Token Generation Event or launch and distribute the PhunCoins
to the holders of Series F convertible preferred stock. Furthermore, there is no current market for PhunCoin, and they currently
do not exist. Accordingly, at the time of the closings of the fifth and sixth rounds of Series F convertible preferred stock financing
in 2018, the Company has determined there is no value assigned to the warrants of PhunCoin issued to Series F convertible preferred
stockholders, and the warrant continues to have no value.
9. Stockholders’ Equity and Stock-Based
Compensation
Common Stock
Total common stock authorized to be issued
as of September 30, 2018 was 75,000,000, with a par value of $0.001 per share. At September 30, 2018 and December 31, 2017, there
were 7,793,233 and 7,231,817 shares outstanding, respectively. Included in outstanding shares are 69,178 and 48,912 shares of unvested
shares from early stock option exercises amounting to $29 and $12 in accrued expenses as of September 30, 2018 and December 31,
2017, respectively.
Dividends
Dividends are paid on a when-and-if-declared
basis. The Company did not declare any dividends during 2018.
Stock Compensation Plan
In 2009, the Company adopted its 2009 Equity
Incentive Plan (the Plan), which allowed for the granting of incentive and non-statutory stock options, as defined by the Internal
Revenue Code, to employees, directors, and consultants. The exercise price of the options granted is generally equal to the value
of the Company’s common stock on the date of grant, as determined by the Company’s Board of Directors. The awards are
exercisable and vest, generally over four years, in accordance with each option agreement. The term of each option is no more than
ten years from the date of the grant. The Plan allows for options to be immediately exercisable, subject to the Company’s
right of repurchase for unvested shares at the original exercise price. The total amount received in exchange for these shares
has been included in accrued expenses on the accompanying consolidated balance sheets and is reclassified to equity as the shares
vest. The total number of shares of common stock authorized under the plan is 10,000,000. The Plan had available for future issuances
1,318,467 and 4,209,805 shares of common stock as of September 30, 2018 and December 31, 2017, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation
under provisions which require that share-based payment transactions with employees be recognized in the consolidated financial
statements based on their fair value and recognized as compensation expense over the vesting period. The amount of expense recognized
during the period is affected by subjective assumptions, including estimates of the Company’s future volatility, the expected
term for its stock options, the number of options expected to ultimately vest, and the timing of vesting for the Company’s
share-based awards.
The Company uses a Black-Scholes option-pricing
model to estimate the fair value of its stock option awards. The calculation of the fair value of the awards using the Black-Scholes
option-pricing model is affected by the Company’s stock price on the date of grant as well as assumptions regarding the following:
|
●
|
Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of the award. The Company’s estimated volatility through September 30, 2018, was based on a weighted average of the historical stock volatilities of similar peer companies whose stock prices were publicly available. The calculation of estimated volatility is based in part on historical stock prices of these peer entities over a period equal to the expected life of the awards. The Company continues to use the historical volatility of peer entities as the Company is non-public.
|
|
●
|
The expected term represents the period of time that awards granted are expected to be outstanding. The Company calculated the expected term using the simplified method as the Company did not have enough historical data to allow for a weighted average term based on historical exercise patterns.
|
|
●
|
The risk-free interest rate is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the stock option award is granted with a maturity equal to the expected term of the stock option award.
|
|
●
|
The assumed dividend yield is based on the Company’s expectation that it will not pay dividends in the foreseeable future.
|
Valuation of Stock Options
The assumptions used to compute stock-based
compensation costs for the stock options granted during the three and nine months ended September 30 are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted average risk-free rate
|
|
|
N/A
|
|
|
|
2.10
|
%
|
|
|
2.51
|
%
|
|
|
2.00
|
%
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average expected life (years)
|
|
|
N/A
|
|
|
|
7.99
|
|
|
|
6.08
|
|
|
|
6.84
|
|
Weighted average volatility
|
|
|
N/A
|
|
|
|
67.70
|
%
|
|
|
56.87
|
%
|
|
|
67.70
|
%
|
A summary of the Company’s stock option
activity under the Plan and is as follows:
|
|
|
|
Number of Shares
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining Contractual Term
(years)
|
|
|
Aggregate Intrinsic
Value
|
|
12/31/2017
|
|
Beginning Outstanding
|
|
|
3,087,959
|
|
|
$
|
0.25
|
|
|
|
7.18
|
|
|
$
|
53
|
|
|
|
Granted
|
|
|
3,856,700
|
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(560,083
|
)
|
|
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Expired
|
|
|
(956,430
|
)
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
9/30/2018
|
|
Ending Outstanding
|
|
|
5,428,146
|
|
|
$
|
0.42
|
|
|
|
8.35
|
|
|
$
|
3,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and exercisable
|
|
|
2,345,459
|
|
|
$
|
0.26
|
|
|
|
6.65
|
|
|
$
|
1,867
|
|
Compensation Cost
Compensation cost that has been included
on the Company’s consolidated statements of operations for all stock-based compensation arrangements for the three and nine
months ended September 30 is detailed as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
14
|
|
|
$
|
2
|
|
|
$
|
32
|
|
|
$
|
14
|
|
Sales and marketing
|
|
|
16
|
|
|
|
8
|
|
|
|
31
|
|
|
|
18
|
|
General and administrative
|
|
|
32
|
|
|
|
8
|
|
|
|
183
|
|
|
|
35
|
|
Research and development
|
|
|
12
|
|
|
|
6
|
|
|
|
39
|
|
|
|
18
|
|
Total Stock-based compensation
|
|
$
|
74
|
|
|
$
|
24
|
|
|
$
|
285
|
|
|
$
|
85
|
|
10. Domestic and Foreign Operations
The Company generates revenue in domestic
and foreign regions. Net revenues attributed to the United States and international geographies are based upon the country in which
the customer is located. The United Kingdom accounted for 18% and 26% of total net revenue for the nine months ended September
30, 2018 and 2017, respectively. Net revenue generated in the United Kingdom for the three months ended September 30, 2018 and
2017 were not material. Information about these operations is presented below:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
5,186
|
|
|
$
|
7,422
|
|
|
$
|
17,983
|
|
|
$
|
16,735
|
|
Europe
|
|
|
23
|
|
|
|
-
|
|
|
|
6,357
|
|
|
|
3,952
|
|
Other international revenue
|
|
|
6
|
|
|
|
5
|
|
|
|
40
|
|
|
|
898
|
|
Total net revenue
|
|
$
|
5,215
|
|
|
$
|
7,427
|
|
|
$
|
24,380
|
|
|
$
|
21,585
|
|
Identifiable long-lived assets attributed
to the United States and international geographies are based upon the country in which the asset is located or owned. As of September
30, 2018, and December 31, 2017, all of the Company’s identifiable long-lived assets were in the United States.
World Wrestling Entertainment (WWE) and
Cisco Systems (Cisco) are investors in the Company’s Series E Preferred Stock and WWE owns a Board observer seat. WWE and
Cisco are also customers of the Company. The following table sets forth the net revenues generated for the three and nine months
ended September 30, 2018 and 2017, as well as the accounts receivable balances as of September 30, 2018 and December 31, 2017 for
WWE and Cisco:
|
|
Net Revenues
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Accounts Receivable as of
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
World Wrestling Entertainment
|
|
$
|
—
|
|
|
$
|
514
|
|
|
$
|
—
|
|
|
$
|
1,152
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cisco Systems
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
1,700
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
11. Subsequent Events
The Company has evaluated subsequent events through February
5, 2019.
The Company issued monthly payments in exchange
for notes payable from Stellar Acquisition III, Inc. (“Stellar”), in the aggregate amount of $74 during October and
November 2018. The note bears no interest and is payable the earlier of (a) the date of consummation of the merger pursuant to
terms of the Merger Agreement, (b) the date that Stellar consummates its initial business combination, or (c) the date of liquidation
of Stellar. This note was also issued in accordance with the merger agreement.
Through the date noted above, the Company has received additional
cash proceeds from its token rights offering of $405, pursuant to which the holders of the Rights will receive an aggregate of
approximately 192.4 million PhunCoin if the Token Generation Event occurs.
On November 1, 2018, the Company and Stellar entered into the
First Amendment to the Merger Agreement, amending the cash available to the post-transaction company of $40 million to $19 million
of cash in the Trust Account at closing (the “Minimum Cash Asset Level”). The Minimum Cash Asset Level was waived by
the Company prior to closing. Further, the warrants available for purchase to Phunware shareholders as part of the merger consideration
increased from 929,890 warrants to 3,985,244, of which 2,450,000 warrants at a price of $0.50 per warrant for an aggregate price
of $1,225,000 will be purchased by the Company at closing. The remaining 1,535,244 warrants may be issued if Phunware shareholders
so elect, and the additional purchase would be issued in a promissory note at a price of $0.50 per warrant to certain Stellar shareholders.
This was further amended between the Company and Stellar such that the entire purchase amount of the warrants would be issued in
a note. The approximate amount of the note to be issued at closing is $1,993 (the “Transfer Sponsor Warrant Notes”).
Subsequent the Reverse Merger and Recapitalization (defined below), the note was waived, as more fully described below.
On December 26, 2018, the Company consummated the transaction
contemplated by the Merger Agreement (the “Reverse Merger and Recapitalization”). In connection with the closing of
the Reverse Merger and Recapitalization, the registrant changed its name from Stellar Acquisition III, Inc. to Phunware, Inc (“Successor”).
Furthermore, 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 Reverse Merger and Recapitalization (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”). 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”. The per share Merger Consideration paid to Phunware Stockholders was 0.459 shares of Successor stock
for each share of Phunware Stock. The Minimum Cash Asset Level was waived by the Company prior to Closing.
Notes receivable issued to Stellar in the aggregate of $536
were eliminated with the assumption of Stellar’s balance sheet as a result of the Reverse Merger and Recapitalization.
On January 15, 2019, Phunware and the holders of the Transfer
Sponsor Warrant Notes agreed to amend, waive and forgive the Transfer Sponsor Warrant Notes in their entireties, effective as of
December 26, 2018. The waiver of the Transferred Sponsor Warrant Note had no effect on the holder of outstanding shares of Phunware
stock (as determined immediately prior to the Merger) right to receive, should they have elected, the Transfer Sponsor Warrants
as consideration in the Reverse Merger and Recapitalization.
Through the date noted above, the Company received exercises
of warrants for the purchase of 350,788 Successor shares for aggregate gross proceeds of $3,233, of which $3,141 was received in
cash and $92 was received in digital currencies.
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 Reverse Merger and Recapitalization, 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
Reverse Merger and Recapitalization, 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.
The shares are mandatorily redeemable in
cash at the following schedule; (i) 104% of the aggregate value of three thousand (3,000) shares on the 30 day anniversary of the
issuance; (ii) 104% of the aggregate value of two thousand five hundred (2,500) shares on the 60
th
anniversary of the
original issue; and (iii) 104% of the aggregate value of five hundred (500) shares of the 90
th
anniversary of the original
issue. The Preferred Stock is also convertible into shares of the Company’s common stock 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. Generally, the Preferred Stock does not have voting rights. Furthermore, in
the event of liquidation, dissolution or winding up of the Company the Preferred Stock would be entitled to receive assets ahead
of the Company’s common stockholders.
In conjunction with the Reverse Merger and
Recapitalization, the Company entered into at-will employment agreements with seven senior-level and executive employees with aggregate
annual base salaries of $1,615. The employment agreement has an initial term of four years and automatically renews for one-year
periods should either party not terminate within ninety days prior to the date of automatic renewal. The employment agreement outlines
provisions around bonus, equity, severance and other employment benefits. Should employment terminate within the first two years
without cause or a change of control, the executive would be granted severance payment equal to two years of base salary and two
years of annualized bonuses earned along with immediate vesting of options. At the conclusion of the second year, the severance
amount would be one-year of base salary and immediate vesting of options.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
Stellar
Acquisition III, Inc.
We
have audited the accompanying balance sheets of Stellar Acquisition III Inc.(the “Company”), as of November
30, 2017 and 2016 and the related statements of operations, changes in stockholders’ equity, and cash flows for the year
ended November 30, 2017 and the period from December 8, 2015 (date of inception) through November 30, 2016, and the related notes
(collectively referred to as the “financial statements”). These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above presents fairly, in all material respects, the financial position of Stellar
Acquisition III Inc. as of November 30, 2017 and 2016, and the results of its operations and its cash flows for the year ended
November 30, 2017 and the period from December 8, 2015 (date of inception) through November 30, 2016 in accordance with accounting
principles generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 1 to the financial statements if the Company is unable to complete a Business Combination by February 24, 2018 (or by
May 24, 2018 if the Company extends the period of time to consummate a Business Combination), then the Company will cease all
operations except for the purpose of winding up and liquidating. This mandatory liquidation and subsequent dissolution raises
substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
WithumSmith+Brown, PC
New
York, NY
February
9, 2018
Stellar
Acquisition III Inc.
Balance Sheets
|
|
November 30,
2017
|
|
|
November 30,
2016
|
|
Assets
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash on hand and in Bank
|
|
$
|
117,205
|
|
|
$
|
490,888
|
|
Prepaid expenses
|
|
|
16,869
|
|
|
|
32,219
|
|
Total current assets
|
|
|
134,074
|
|
|
|
523,107
|
|
Cash and investments held in the Trust Account
|
|
|
71,215,856
|
|
|
|
70,442,615
|
|
Total assets
|
|
$
|
71,349,930
|
|
|
$
|
70,965,722
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
124,931
|
|
|
$
|
24,750
|
|
Accrued liabilities
|
|
|
12,500
|
|
|
|
25,500
|
|
Unsecured promissory notes – related parties
|
|
|
604,300
|
|
|
|
|
|
Total current liabilities
|
|
|
741,731
|
|
|
|
50,250
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
Deferred underwriting fees
|
|
|
1,725,153
|
|
|
|
1,725,153
|
|
Total non-current liabilities
|
|
|
1,725,153
|
|
|
|
1,725,153
|
|
Total Liabilities
|
|
|
2,466,884
|
|
|
|
1,775,403
|
|
Common stock subject to possible redemption: 6,192,221 and 6,293,168 shares on November 30, 2017 and November 30, 2016, respectively (at a redemption value of approximately $10.32 and $10.20, respectively)
|
|
|
63,883,039
|
|
|
|
64,190,314
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred shares, $0.0001 par value, 10,000,000 shares authorized, no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.0001 par value, 200,000,000 shares authorized, 2,817,956 and 2,717,009 shares issued and outstanding on November 30, 2017 and November 30, 2016, respectively (excluding 6,192,221 and 6,293,168 shares on November 30, 2017 and November 30, 2016, respectively subject to redemption)
|
|
|
282
|
|
|
|
272
|
|
Additional paid-in capital
|
|
|
5,397,188
|
|
|
|
5,089,922
|
|
Accumulated deficit
|
|
|
(397,463
|
)
|
|
|
(90,189
|
)
|
Total shareholders’ equity
|
|
|
5,000,007
|
|
|
|
5,000,005
|
|
Total liabilities and shareholders’ equity
|
|
$
|
71,349,930
|
|
|
$
|
70,965,722
|
|
See
accompanying notes to financial statements.
Stellar
Acquisition III Inc.
Statement of Operations
|
|
Year ended November 30,
2017
|
|
|
Period from December 8, 2015
(inception) to November 30,
2016
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
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
|
)
|
See
accompanying notes to financial statements.
Stellar
Acquisition III Inc.
Statement
of Changes in Shareholders’ Equity
For
the year ended November 30, 2017 and period from December 8, 2015 (inception)
through November 30, 2016
|
|
Shares of common stock
|
|
|
Additional
paid-in
|
|
|
Accumulated
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance at December 8, 2015
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Shares of common stock issued at $50.00 per share
|
|
|
500
|
|
|
|
1
|
|
|
|
24,999
|
|
|
|
—
|
|
|
|
25,000
|
|
Effect of 4,600 to 1 stock split
|
|
|
2,299,500
|
|
|
|
229
|
|
|
|
(229
|
)
|
|
|
—
|
|
|
|
—
|
|
Cancellation of Sponsors’ shares
|
|
|
(129,839
|
)
|
|
|
(13
|
)
|
|
|
13
|
|
|
|
—
|
|
|
|
—
|
|
Sale of August 24, 2016 of 6,500,000 units at $10 per unit,
|
|
|
6,500,000
|
|
|
|
650
|
|
|
|
64,999,350
|
|
|
|
—
|
|
|
|
65,000,000
|
|
Underwriters’ discount and offering expenses
|
|
|
|
|
|
|
|
|
|
|
(3,543,852
|
)
|
|
|
|
|
|
|
(3,543,852
|
)
|
Issuance of 100,000 shares to underwriters as compensation in connection with the initial public offering on August 24, 2016
|
|
|
100,000
|
|
|
|
10
|
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
—
|
|
Proceeds from sale of warrants to Sponsors
|
|
|
—
|
|
|
|
—
|
|
|
|
3,825,000
|
|
|
|
—
|
|
|
|
3,825,000
|
|
Proceeds from sale of 400,610 units at $10 per unit due to partial exercise of over-allotment on September 28, 2016
|
|
|
400,610
|
|
|
|
40
|
|
|
|
4,006,060
|
|
|
|
—
|
|
|
|
4,006,100
|
|
Proceeds from sale of warrants to Sponsors due to over-allotment
|
|
|
—
|
|
|
|
—
|
|
|
|
160,244
|
|
|
|
—
|
|
|
|
160,244
|
|
Underwriters’ discount and offering expenses (over-allotment)
|
|
|
—
|
|
|
|
—
|
|
|
|
(191,984
|
)
|
|
|
—
|
|
|
|
(191,984
|
)
|
Issuance of additional shares to underwriters (over-allotment)
|
|
|
6,164
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
Sponsors’ shares cancelled (over-allotment)
|
|
|
(166,758
|
)
|
|
|
(17
|
)
|
|
|
17
|
|
|
|
—
|
|
|
|
—
|
|
Change in shares subject to redemption
|
|
|
(6,293,168
|
)
|
|
|
(629
|
)
|
|
|
(64,189,685
|
)
|
|
|
—
|
|
|
|
(64,190,314
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(90,189
|
)
|
|
|
(90,189
|
)
|
Balance at November 30, 2016
|
|
|
2,717,009
|
|
|
$
|
272
|
|
|
$
|
5,089,922
|
|
|
$
|
(90,189
|
)
|
|
$
|
5,000,005
|
|
Change in shares subject to redemption
|
|
|
100,947
|
|
|
|
10
|
|
|
|
307,266
|
|
|
|
|
|
|
|
307,276
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(307,274
|
)
|
|
|
(307,274
|
)
|
Balance at November 30, 2017
|
|
|
2,817,956
|
|
|
$
|
282
|
|
|
$
|
5,397,188
|
|
|
$
|
(397,463
|
)
|
|
$
|
5,000,007
|
|
See
accompanying notes to financial statements.
Stellar
Acquisition III Inc.
Statement of Cash Flows
|
|
Year
ended
November 30,
2017
|
|
|
Period from
December 8,
2015
(inception) to
November 30,
2016
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(307,274
|
)
|
|
$
|
(90,189
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Decrease (increase) in prepaid expenses
|
|
|
15,350
|
|
|
|
(32,219
|
)
|
Increase in accounts payable
|
|
|
100,181
|
|
|
|
24,750
|
|
Increase (decrease) in accrued liabilities
|
|
|
(13,000
|
)
|
|
|
25,500
|
|
Net cash used in operating activities
|
|
$
|
(204,743
|
)
|
|
$
|
(72,158
|
)
|
Net cash used in Investing Activities,
|
|
|
—
|
|
|
|
|
|
Cash deposited in Trust Account
|
|
|
(604,300
|
)
|
|
|
(70,386,222
|
)
|
Interest income earned on Trust Account
|
|
|
(554,954
|
)
|
|
|
(56,393
|
)
|
Interest withdrawn from Trust Account
|
|
|
386,014
|
|
|
|
—
|
|
Net cash used in investing activities
|
|
$
|
(773,240
|
)
|
|
$
|
(70,442,615
|
)
|
Cash Flows from Financing Activities
|
|
|
—
|
|
|
|
|
|
Proceeds from sale of Sponsors’ shares of common stock
|
|
|
—
|
|
|
|
25,000
|
|
Proceeds from sale of Public Offering Units, net of offering expenses paid
|
|
|
—
|
|
|
|
66,995,417
|
|
Proceeds from sale of Private Placement Warrants
|
|
|
—
|
|
|
|
3,985,244
|
|
Payments to related parties (including loans)
|
|
|
—
|
|
|
|
(250,535
|
)
|
Funds from related parties (including loans)
|
|
|
604,300
|
|
|
|
250,535
|
|
Net cash provided by financing activities
|
|
$
|
604,300
|
|
|
$
|
71,005,661
|
|
Net (decrease)/increase in cash
|
|
|
(373,683
|
)
|
|
|
490,888
|
|
Cash at beginning of period
|
|
|
490,888
|
|
|
|
—
|
|
Cash at end of period
|
|
$
|
117,204
|
|
|
$
|
490,888
|
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Deferred underwriting fees
|
|
$
|
—
|
|
|
$
|
1,725,153
|
|
Common stock issued for additional underwriter compensation
|
|
$
|
—
|
|
|
$
|
1,061,640
|
|
Fair value of unit purchase option issued to underwriter
|
|
$
|
—
|
|
|
$
|
781,385
|
|
Interest contributed for extension
|
|
$
|
200,772
|
|
|
$
|
—
|
|
The
accompanying notes are an integral part of the financial statements.
Stellar
Acquisition III Inc.
Notes to Financial Statements
NOTE
1 — DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Organization
and General
Stellar
Acquisition III Inc. (the “Company”) was incorporated pursuant to the laws of the Republic of the Marshall Islands
on December 8, 2015. The Company was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition,
stock purchase, reorganization or similar business combination with one or more businesses (the “Business Combination”).
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended,
or the “Securities Act,” as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).
At
November 30, 2017, the Company had not commenced any operations. All activity for the period from December 8, 2015 (inception)
through November 30, 2017 relates to the Company’s formation and the initial public offering (“Public Offering”)
described below and since August 24, 2016 a search for a target business with which to complete a Business Combination. The Company
will not generate any operating revenues until after completion of a Business Combination, at the earliest. The Company will generate
non-operating income in the form of interest income on cash and cash equivalents from the proceeds derived from the Public Offering.
The Company has selected November 30
th
as its fiscal year end.
Going
Concern Consideration
Following
the Company’s announcements on August 24, 2017, and November 27, 2017 regarding the first and second extension, respectively,
the Company has until February 24, 2018 to consummate a Business Combination, however, the Company may extend the period of time
to consummate a Business Combination by an additional three months (or until May 24, 2018 to complete a Business Combination).
The Company’s Sponsors or their affiliates or designees have the option, but not the obligation, to extend the time to consummate
a Business Combination. The Sponsors or their affiliates or designees, upon five days advance notice prior to the applicable deadline,
must deposit into the Trust Account $402,536 ($0.058 per unit, the “Extension Funds”) on or prior to the date of the
applicable deadline, for the three month extension.
As
of the date of the issuance of these financial statements, the Company’s Sponsors intend to utilize these extensions, as
and if necessary, in order to extend the period in which the Company has to complete a Business Combination.
In
connection with the Company’s assessment of going concern considerations in accordance with FASB’s Accounting Standards
Update (“ASU”) 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going
Concern,” management has determined that the mandatory liquidation and subsequent dissolution raises substantial doubt about
the Company’s ability to continue as a going concern. No adjustments have been made to the carrying amounts of assets or
liabilities should the Company be required to liquidate after May 24, 2018.
Sponsors
and Public Financing:
The
Company’s sponsors are Astra Maritime Inc. and Dominium Investments Inc., affiliated with the Company’s Chairman and
co-Chief Executive Officer, and Magellan Investments Corp. and Firmus Investments Inc., affiliated with our co-Chief Executive
Officer and Chief Financial Officer. All four companies were incorporated pursuant to the laws of the Republic of the Marshall
Islands (the “Sponsors”). The registration statement (the “Registration Statement”) for the Public Offering
(as described in Note 3) was declared effective by the United States Securities and Exchange Commission (the “SEC”)
on August 18, 2016. The Company intends to finance a Business Combination with the net proceeds from the $69,006,100 raised in
the Public Offering (Note 3) and the $3,985,244 private placement in each case including the partial exercise of the underwriter’s
overallotment option. Upon the closing of the Public Offering and the private placement, $70,386,222 was deposited in a Trust
Account with Continental Stock Transfer and Trust Company acting as trustee (the “Trust Account”) as discussed below.
On August 24, 2017, and November 24, 2017, the period of time the Company has to consummate a business combination was extended
by three months by increasing the minimum amount in the Trust Account by $402,536 each time, pursuant to the Company’s prospectus
in connection with the Company’s initial public offering.
Stellar
Acquisition III Inc.
Notes to Financial Statements
NOTE
1 — DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
(cont.)
The
Trust Account:
The
Trust Account will be invested only in U.S. government treasury bills with a maturity of one hundred and eighty (180) days or
less or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act of 1940 which invest
only in direct U.S. government obligations. Funds will remain in the Trust Account until the earlier of (i) the consummation of
its initial Business Combination or (ii) the distribution of the Trust Account as described below. The remaining proceeds outside
the Trust Account may be used to pay for business, legal and accounting due diligence expenses for prospective acquisition targets
and continuing general and administrative expenses. The proceeds held from the Public Offering were used to invest in U.S. government
treasury bills with a maturity of one hundred and eighty (180) days or less or in money market funds meeting certain conditions
under Rule 2a-7 under the Investment Company Act of 1940 which invest only in direct U.S. government obligations. At November
30, 2017, the Trust Account consisted of US treasury bills yielding interest of approximately 1.3% per annum, with a value of
$71,215,004 and another $852 held as cash and cash equivalents.
The
Company’s amended and restated articles of incorporation provides that, other than the withdrawal of interest to pay taxes,
if any, or working capital expenses, none of the funds held in the Trust Account will be released until the earlier of: (i) the
completion of the Business Combination; or (ii) the redemption of 100% of the shares of common stock included in the Units being
sold in the Public Offering if the Company is unable to complete a Business Combination by February 24, 2018 (or by May 24, 2018
if the Company extends the period of time to consummate a Business Combination, in accordance with the terms of the Company’s
charter) (subject to the requirements of law). On March 17, 2017, May 16, 2017, August 29, 2017 and October 3, 2017, the Company
withdrew $55,000, $165,000, $60,000 and $106,000 of interest earned from the Trust Account to pay for working capital expenses,
respectively. Additionally, $99,236 and $101,536 of interest was used for the first and second extension on August 24 and November
24, 2017, respectively.
Business
Combination:
The
Company’s management has broad discretion with respect to the specific application of the net proceeds of the Public Offering,
although it initially intends to focus its efforts within the international energy logistics industry. Substantially all of the
net proceeds of the Public Offering and the private placement are intended to be generally applied toward consummating a Business
Combination with (or acquisition of) a Target Business. As used herein, “Target Business” means one or more target
businesses that together have a fair market value equal to at least 80% of the balance in the Trust Account (less any deferred
underwriting commissions and taxes payable on interest earned) at the time of the Company signing a definitive agreement in connection
with the Business Combination. There is no assurance that the Company will be able to successfully effect a Business Combination.
The
Company, after signing a definitive agreement for a Business Combination, will either (i) seek stockholder approval of the Business
Combination at a meeting called for such purpose in connection with which shareholders may seek to redeem their shares, regardless
of whether they vote for or against the Business Combination, for cash equal to their pro rata share of the aggregate amount then
on deposit in the Trust Account as of two business days prior to the consummation of the initial Business Combination, including
interest but less taxes payable or amounts released to the Company for working capital, or (ii) provide shareholders with the
opportunity to sell their shares to the Company by means of a tender offer (and thereby avoid the need for a stockholder vote)
for an amount in cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account as of two business
days prior to commencement of the tender offer, including interest but less taxes payable or amounts released to the Company for
working capital. The decision as to whether the Company will seek stockholder approval of the Business Combination or will allow
shareholders to redeem their shares in a tender offer will be made by the Company, solely in its discretion, and will be based
on a variety of factors such as whether the Company is a foreign private issuer, the timing of the transaction and whether the
terms of the transaction would otherwise require the Company to seek stockholder approval unless a vote is required by NASDAQ
rules. If the Company seeks stockholder approval, it will complete its Business Combination only if a majority of the outstanding
shares of common stock voted are voted in favor of the Business Combination. However, in no event will the Company redeem its
Public Shares in an amount that would cause its net tangible assets to be less than $5,000,001 upon consummation of the initial
Business Combination. In such case, the Company would not proceed with the redemption of its Public Shares and the related Business
Combination, and instead may search for an alternate Business Combination.
Stellar
Acquisition III Inc.
Notes to Financial Statements
NOTE
1 — DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
(cont.)
If
the Company holds a shareholder vote or there is a tender offer for shares in connection with a Business Combination, a public
shareholder will have the right to redeem its shares for an amount in cash equal to their pro rata share of the aggregate amount
then on deposit in the Trust Account as of two business days prior to the consummation of the initial Business Combination, including
interest but less taxes payable or amounts released to the Company for working capital purposes. As a result, such shares of common
stock have been recorded at redemption amount and classified as temporary equity upon the completion of the Public Offering, in
accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 480,
“Distinguishing Liabilities from Equity.” The amount in the Trust Account is initially $10.20 per public common share
($70,386,222 held in the Trust Account divided by 6,900,610 public common shares), subject to increase of up to an additional
$0.175 per unit in the event that the Sponsors elect to extend the period of time to consummate a Business Combination, as described
in more detail below. Following the first two extensions, the minimum amount in the Trust Account is $10.32 per public common
share ($71,191,294 held in the Trust Account divided by 6,900,610 public common shares).
The
Company has until February 24, 2018 to consummate a Business Combination. However, if the Company anticipates that it may not
be able to consummate a Business Combination by then, the Company may extend the period of time to consummate a Business Combination
by an additional three months (or by May 24, 2018, to complete a Business Combination). Pursuant to the terms of our amended and
restated articles of incorporation and the trust agreement entered into between us and Continental Stock Transfer & Trust
Company on August 18, 2016, and following the partial exercise of the underwriters’ overallotment option on September 28,
2016 in order to extend the time available for us to consummate our initial Business Combination, our Sponsors or their affiliates
or designees, upon five days advance notice prior to the applicable deadline, must deposit into the Trust Account $402,536 ($0.058
per unit), on or prior to the date of the applicable deadline, for each three month extension. Our Sponsors and their affiliates
or designees are not obligated to fund the Trust Account to extend the time for us to complete our initial Business Combination.
To the extent that some, but not all, of our Sponsors, decide to extend the period of time to consummate our initial Business
Combinations, such Sponsors (or their affiliates or designees) may deposit the entire $402,536 amount. In the event that interest
in the trust is available for withdrawal for working capital purposes and has not been used to pay taxes or other working capital
expenses, the Company may apply the accrued interest in the Trust Account or such withdrawn interest to the Sponsors’ obligation
to loan the Company money in connection with an extension, and the amount that the Sponsors would be obligated to loan the Company
in connection with such extension would be reduced by the amount of interest so applied. If the Company does not complete a Business
Combination within this period of time, it shall (i) cease all operations except for the purposes of winding up; (ii) as promptly
as reasonably possible, but not more than ten business days thereafter, redeem the Public Shares of common stock for a per share
pro rata portion of the Trust Account, including interest, but less taxes payable or amounts released to the Company for working
capital (less up to $50,000 of such net interest to pay dissolution expenses) and (iii) as promptly as possible following such
redemption, dissolve and liquidate the balance of the Company’s net assets to its remaining shareholders, as part of its
plan of dissolution and liquidation. The initial shareholders have entered into letter agreements with the Company, pursuant to
which they have waived their rights to participate in any redemption with respect to their founder shares; however, if the initial
shareholders or any of the Company’s officers, directors or affiliates acquire shares of common stock in or after the Public
Offering, they will be entitled to a pro rata share of the Trust Account upon the Company’s redemption or liquidation with
respect to such shares in the event the Company does not complete a Business Combination within the required time period.
In
the event of such distribution, it is possible that the per share value of the residual assets remaining available for distribution
(including Trust Account assets) will be less than the initial public offering price per Unit in the Public Offering.
Stellar
Acquisition III Inc.
Notes to Financial Statements
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation:
The
accompanying financial statements of the Company are presented in U.S. dollars in conformity with accounting principles generally
accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Emerging
Growth Company:
Section
102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting
standards until private companies (that is, those that have not had a Securities Act registration statement declared effective
or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial
accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with
the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has
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, the Company, as an emerging growth company, can adopt the new or revised standard
at the time private companies adopt the new or revised standard.
Net
Loss per Ordinary Share
Net
loss per common share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares
of common stock outstanding, ineligible for redemption, during the period, plus to the extent dilutive the incremental number
of shares of common stock to settle Warrants, as calculated using the treasury stock method. At November 30, 2017 and 2016, the
Company had outstanding Warrants to purchase 14,871,098 shares of common stock. For all periods presented, these shares were excluded
from the calculation of diluted loss per share of common stock because their inclusion would have been antidilutive. As a result,
diluted loss per common share is the same as basic loss per common share for the period.
Concentration
of Credit Risk:
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution
in Cyprus, which has no deposit insurance. The Company has not experienced losses on these accounts and management believes the
Company is not exposed to significant risks on such accounts.
Fair
Value of Financial Instruments:
The
fair value of the Company’s assets and liabilities, which qualify as financial instruments under FASB ASC 820, “Fair
Value Measurements and Disclosures,” approximates the carrying amounts represented in the balance sheet.
Use
of Estimates:
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from
those estimates.
Cash
and securities held in Trust Account:
At
November 30, 2017 and 2016, the assets held in the Trust Account were held in cash and U.S. Treasury Bills. On March 17, 2017,
May 16, 2017, August 29, 2017 and October 3, 2017, the Company withdrew $55,000, $165,000, $60,000 and $106,000 of interest earned
from the Trust Account to pay for working capital expenses, respectively. Additionally, $99,236 and $101,536 of interest was used
for the first and second extension on August 24 and November 24, 2017, respectively.
Stellar
Acquisition III Inc.
Notes to Financial Statements
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont.)
Income
Taxes:
There
is, at present, no direct taxation in the Marshall Islands and interest, dividends, and gains payable to the Company are received
free of all Marshall Islands taxes. The Company is registered as an “exempted company” pursuant to the Marshall Islands
Business Corporations Act (as amended). As the Company proceeds with making investments in various jurisdictions, tax considerations
outside the Marshall Islands may arise. Although the Company intends to pursue tax-efficient investments, it may be subject to
income tax, withholding tax, capital gains tax, and other taxes imposed by tax authorities in other jurisdictions. For U.S. tax
purposes, the Company expects to be treated as a passive foreign investment company by its U.S. shareholders. The Company does
not expect to be subject to direct taxation based on net income in the U.S. as long as it maintains its non-U.S. trade or business
status. The Company does not expect to invest in any U.S. obligation that will be subject to U.S. withholding taxes. As of November
30, 2017 and 2016, the Company has not commenced operations and thus has no uncertain tax positions.
The
Company follows the provisions of ASC 740-10 which prescribes a recognition threshold and measurement attribute for how a company
should recognize, measure, present and disclose in its financial statements uncertain tax positions that the Company has taken
or expects to take on its tax return. ASC 740-10 requires that the financial statements reflect expected future tax consequences
of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without considering
time values. There were no adjustments related to uncertain tax positions recognized during the year ended November 30, 2017 and
the period December 8, 2015 (inception) to November 30, 2016.
Redeemable
Common Stock:
As
discussed in Note 3, all common shares sold as part of a Unit in the Public Offering contain a redemption feature which allows
for the redemption of common shares under the Company’s Liquidation or Tender offer/stockholder/approval provisions. In
accordance with FASB ASC 480, redemption provisions not solely within the control of the Company require the security to be classified
outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of an entity’s
equity instruments, are excluded from the provisions of FASB ASC 480. Although the Company did not specify a maximum redemption
threshold, its charter provides that in no event will it redeem its Public Shares in an amount that would cause its net tangible
assets (shareholders’ equity) to be less than $5,000,001.
The
Company recognizes changes in redemption value immediately as they occur and will adjust the carrying value of the security to
equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common
stock shall be affected by charges against additional paid-in capital.
Accordingly,
at November 30, 2017 and 2016, 6,192,221 and 6,293,168 of the 6,900,410 Public Shares were classified outside of permanent equity
at its redemption value.
Recent
Accounting Pronouncements:
Management
does not believe there are any recently issued, but not yet effective, accounting pronouncements, that if currently adopted, would
have a material effect on the Company’s financial statements.
Subsequent
Events:
Management
has evaluated subsequent events to determine if events or transactions occurring after the date of the financial statements, require
potential adjustment to or disclosure in the financial statements and has concluded that all such events that would require adjustment
or disclosure have been recognized or disclosed.
Stellar
Acquisition III Inc.
Notes to Financial Statements
NOTE
3 — PUBLIC OFFERING
On
August 24, 2016, the Company closed the Public Offering for the sale of 6,500,000 units at a price of $10.00 per unit (the “Units”).
Each Unit consists of one share of the Company’s common stock, $0.0001 par value (the “Public Shares”) and one
redeemable common stock purchase warrant (the “Warrants”). Under the terms of a warrant agreement, the Company has
agreed to use its best efforts to file a new registration statement under the Securities Act to register the shares of common
stock underlying the Warrants, following the completion of the Business Combination. Each Warrant entitles the holder to purchase
one share of common stock at a price of $11.50. No fractional shares will be issued upon exercise of the Warrants. If, upon exercise
of the Warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round down to
the nearest whole number the number of shares of common stock to be issued to the Warrant holder. Each Warrant will become exercisable
on the later of 30 days after the completion of the Business Combination or 12 months from the closing of the Public Offering
and will expire five years after the completion of the Business Combination or earlier upon redemption or liquidation. However,
if the Company does not complete its initial Business Combination on or prior to the applicable time period to complete the Business
Combination, the Warrants will expire at the end of such period. If the Company is unable to deliver registered shares of common
stock to the holder upon exercise of Warrants issued in connection with the Company’s public Units during the exercise period,
there will be no net cash settlement of these Warrants and the Warrants will expire worthless, unless they may be exercised on
a cashless basis in the circumstances described in the warrant agreement. Once the Warrants become exercisable, the Company may
redeem the outstanding Warrants in whole and not in part at a price of $0.01 per Warrant upon a minimum of 30 days’ prior
written notice of redemption, only in the event that the last sale price of the Company’s shares of common stock equals
or exceeds $21.00 per share for any 20 trading days within the 30-trading day period ending on the third trading day before the
Company sends the notice of redemption to the Warrant holders.
The
Company granted the underwriters an overallotment option to purchase an additional 975,000 Units at $10.00 for 45 days following
the closing of the Public Offering. Following the partial exercise of the underwriters’ overallotment option on September
28, 2016, the Company sold an additional 400,610 Units at a price of $10.00 per unit generating additional gross proceeds of $4,006,100.
The Company paid an underwriting fee of $1,300,000, equal to a 2.00% underwriting discount on the per Unit offering price to the
underwriters, based on a sale of 6,500,000 Units, at the closing of the Public Offering and $80,122 based on a sale of 400,610
Units, following the partial exercise of the underwriters’ overallotment option on September 28, 2016. The Company will
pay an additional fee (the “Deferred Discount”) of 2.5% of the gross offering proceeds payable to underwriters, reduced
pro rata for any share redemptions, upon the Company’s completion of a Business Combination. The Deferred Discount will
become payable to the underwriters from the amounts held in the Trust Account solely in the event the Company completes its initial
Business Combination.
The
Company issued the underwriters, as additional compensation for the Public Offering, 100,000 shares at the close of the Public
Offering. Following the partial exercise of the underwriters’ overallotment option on September 28, 2016, the Company issued
the underwriters, as additional compensation for the Public Offering, another 6,164 shares. The Company accounted for the fair
value of these shares, as an expense of the Public Offering resulting in a charge directly to shareholders’ equity. The
shares were issued at an estimated fair value of $1,061,640.
NOTE
4 — RELATED PARTY TRANSACTIONS
Founder
Shares
The
Company’s initial shareholders currently own 2,003,403 shares of common stock, following the partial exercise of the underwriters’
overallotment option on September 28, 2016. In January 2016, 2,300,000 shares were initially purchased by Messrs. Tsirigakis and
Syllantavos for an aggregate of $25,000, up to 300,000 of which were subject to forfeiture. In January 2016, Messrs. Tsirigakis
and Syllantavos collectively transferred an aggregate of 2,099,900 shares to the Sponsors and an aggregate of 34,500 shares to
the Company’s director nominees. In addition, in January 2016, Messrs. Tsirigakis and Syllantavos collectively transferred
an aggregate of 165,600 shares to the Company’s other initial shareholders. In August 2016, the Sponsors returned to the
Company, at no cost, an aggregate of 129,839 founder shares, which the Company cancelled, leaving an aggregate of 2,170,161 founder
shares outstanding. Following the partial exercise of the underwriters’ overallotment option on September 28, 2016, the
Sponsors returned to the Company, at no cost, an aggregate of 166,758 founder shares, which the Company cancelled, leaving an
aggregate of 2,003,403 founder shares outstanding. The founder shares are identical to the common stock included in the Units
sold in the Public Offering except that the founder shares are subject to certain transfer restrictions, as described in more
detail below. Our initial shareholders currently own 22.2% of the Company’s issued and outstanding shares of common stock.
Stellar
Acquisition III Inc.
Notes to Financial Statements
NOTE
4 — RELATED PARTY TRANSACTIONS
(cont.)
The
Company’s initial shareholders have agreed not to transfer, assign or sell any of their founder shares until the earlier
of (A) one year after the completion of the Business Combination, or earlier if, subsequent to the Business Combination, the last
sale price of the Company’s common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends,
reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least
150 days after the Business Combination or (B) the date on which the Company completes a liquidation, merger, stock exchange or
other similar transaction after the initial Business Combination that results in all of the Company’s shareholders having
the right to exchange their shares of common stock for cash, securities or other property.
Private
Placement Warrants
Upon
the closing of the Public Offering on August 24, 2016, the Sponsors paid the Company $3,825,000 in a private placement for the
purchase of an aggregate of 7,650,000 Warrants at a price of $0.50 per Warrant (the “Private Placement Warrants”).
Following the partial exercise of the underwriters’ overallotment option on September 28, 2016, the Sponsors purchased 320,488
additional Private Placement Warrants for an aggregate price of $160,244. Each Private Placement Warrant entitles the holder to
purchase one share of common stock at $11.50 per share. The purchase price of the Private Placement Warrants have been added to
the proceeds from the Public Offering held in the Trust Account pending completion of the Business Combination. The Private Placement
Warrants (including the common stock issuable upon exercise of the Private Placement Warrants) will not be transferable, assignable
or salable until 30 days after the completion of the initial Business Combination and they will be non-redeemable so long as they
are held by the Sponsors or their permitted transferees. If the Private Placement Warrants are held by someone other than the
Sponsors or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such
holders on the same basis as the Warrants included in the Units being sold in the Public Offering. Otherwise, the Private Placement
Warrants have terms and provisions that are identical to those of the Warrants sold as part of the Units in the Public Offering
and have no net cash settlement provisions.
If
the Company does not complete a Business Combination, then the proceeds will be part of the liquidating distribution to the Public
Shareholders and the Warrants issued to the Sponsors will expire worthless.
Registration
Rights
The
Company’s initial shareholders and holders of the Private Placement Warrants are entitled to registration rights pursuant
to a registration rights agreement executed on August 18, 2016. The Company’s initial shareholders and holders of the Private
Placement Warrants are entitled to make up to three demands, excluding short form registration demands, that the Company register
such securities for sale under the Securities Act. In addition, these holders have “piggy-back” registration rights
to include their securities in other registration statements filed by the Company. The Company will bear the expenses incurred
in connection with the filing of any such registration statements. There are no penalties associated with delays in registering
the securities under the registration rights agreement.
Stellar
Acquisition III Inc.
Notes to Financial Statements
NOTE
4 — RELATED PARTY TRANSACTIONS
(cont.)
Related
Party Loans
As
of January 15, 2016, three of the Company’s Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments
Corp., have agreed to loan the Company an aggregate of $250,000 against the issuance of an unsecured promissory note (the “Note”)
to cover expenses related to the Public Offering. Between January and August 2016, the Company borrowed approximately $207,985
under this loan from the three Sponsors. These loans were non-interest bearing and were paid in full on August 24, 2016. Additionally,
between January and August 2016 Nautilus Energy Management Corp., an affiliate of our co-Chief Executive Officers paid for certain
expenses related to the Company’s roadshow and offering amounting to $42,550. Nautilus Energy Management Corp. was reimbursed
for these expenses in full on August 24, 2016.
On
August 24, 2017 the Company issued unsecured promissory notes (the “First Extension Notes”) in the aggregate amount
of $303,300 to three of the Company’s Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments Corp.,
affiliates of our co-CEOs, Mr. Prokopios (Akis) Tsirigakis, and of Mr. George Syllantavos. Of the aggregate amount of $303,300
received, $65,000 is held outside of a financial institution in cash on hand at the Company and is expected to be deposited in
the Company’s operating cash account. The Trust Account was funded properly for the extension. These funds, which were deposited
into the Trust Account, were used to extend the period of time the Company has to consummate a business combination by three months
to November 24, 2017.
On
November 23, 2017 the Company issued unsecured promissory notes (the “Second Extension Notes”) in the aggregate amount
of $301,000 to three of the Company’s Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments Corp.,
affiliates of our co-CEOs, Mr. Prokopios (Akis) Tsirigakis, and of Mr. George Syllantavos. These funds, which were deposited into
the Trust Account, were used to extend the period of time the Company has to consummate a business combination by three months
to February 24, 2018.
As
of November 30, 2017, the outstanding loans to related parties amounted to $604,300.
Both
the First Extension Notes and the Second Extension Notes (the “Extension Notes”) bear no interest and are repayable
in full upon consummation of the Company’s initial business combination. The Sponsors have the option to convert any unpaid
balance of the Notes into warrants exercisable for shares of the Company’s common stock, based on a conversion price of
$0.50 per warrant. The terms of any such warrants shall be identical to the terms of the warrants issued pursuant to the private
placement that was consummated by the Company in connection with the Company’s initial public offering.
Administrative
Service Agreement and Services Agreement
The
Company has agreed to pay $10,000 a month for office space, administrative services and secretarial support to Nautilus Energy
Management Corp., an affiliate of our co-Chief Executive Officers. Services commenced on the date the securities were first listed
on the NASDAQ Capital Market on August 19, 2016 and will terminate upon the earlier of the consummation by the Company of an initial
Business Combination or the liquidation of the Company. For the period from December 5, 2015 (inception) through November 30,
2017, the Company paid $154,194 under this agreement, $120,000 of which was for the year ended November 30, 2017.
NOTE
5 — COMMITMENTS AND CONTINGENCIES
The
Company paid an underwriting fee of $1,300,000, equal to a 2.00% underwriting discount on the per Unit offering price to the underwriters,
based on a sale of 6,500,000 Units, at the closing of the Public Offering, Following the partial exercise of the underwriters’
overallotment option on September 28, 2016, the Company paid an additional underwriting fee of $80,122. The Company will pay an
additional fee (the “Deferred Discount”) of 2.5% of the gross offering proceeds payable to underwriters, reduced pro
rata for any share redemptions, upon the Company’s completion of a Business Combination. The Deferred Discount will become
payable to the underwriters from the amounts held in the Trust Account solely in the event the Company completes its initial Business
Combination.
Stellar
Acquisition III Inc.
Notes to Financial Statements
NOTE
5 — COMMITMENTS AND CONTINGENCIES
(cont.)
The
Company sold to the underwriters for $100, an option to purchase up to a total of 130,000 units, exercisable at $11.50 per unit
(or an aggregate exercise price of $1,495,000) upon the closing of the Public Offering. The purchase option may be exercised for
cash or on a cashless basis, at the holder’s option, at any time during the period commencing on the later of the first
anniversary of the effective date of the Registration Statement and the closing of our initial Business Combination and terminating
on the fifth anniversary of such effectiveness date. The units issuable upon exercise of this option are identical to those offered
in the Public Offering. The Company accounted for the fair value of the unit purchase option, net of the receipt of the $100 cash
payment, as an expense of the Public Offering resulting in a charge directly to shareholders’ equity. The Company estimates
the fair value of this unit purchase option is $6.23 per unit (for a total fair value of approximately $781,000) using a Black-Scholes
option-pricing model. The fair value of the unit purchase option granted to the underwriter is estimated as of the date of grant
using the following assumptions: (1) expected volatility of 37.8% (2) risk-free interest rate of 1.83% and (3) expected life of
5 years. Because the Company’s units do not have a trading history, the volatility assumption is based on information currently
available to management. The volatility assumption was calculated using the average volatility of stock prices of a selection
of companies within the energy logistics space, which are representative of the sectors on which the company intends to focus
for the initial business transaction, including: Arc Logistics Partners LP, Ardmore Shipping Corporation, Blueknight Energy Partners,
L.P., Buckeye Partners, L.P., Cheniere Energy, Inc., DHT Holdings, Inc., Dorian LPG Ltd., EnLink Midstream, LLC, GasLog Ltd.,
Genesis Energy LP, Golar LNG Ltd., Kinder Morgan, Inc., Magellan Midstream Partners LP, Navigator Holdings Ltd., Nordic American
Tankers Limited, NuStar GP Holdings, LLC, ONEOK Inc., PBF Logistics LP, Scorpio Tankers Inc., StealthGas, Inc., Teekay Tankers
Ltd., Tsakos Energy Navigation Limited. The Company believes that the volatility estimate is a reasonable benchmark to use in
estimating the expected volatility of the units. Although an expected life of five years was used in the calculation, if the Company
does not consummate a Business Combination within the prescribed time period and it liquidates, the option will become worthless.
The unit purchase option may be exercised for cash or on a “cashless” basis, at the holder’s option, such that
the holder may use the appreciated value of the unit purchase option (the difference between the exercise prices of the unit purchase
option and the underlying Warrants and the market price of the Units and underlying ordinary shares) to exercise the unit purchase
option without the payment of cash.
The
Company issued the underwriters, as additional compensation for the Public Offering, 100,000 shares at the close of the Public
Offering. Following the partial exercise of the underwriters’ overallotment option on September 28, 2016, the Company issued
the underwriters, as additional compensation for the Public Offering, another 6,164 shares. The Company accounted for the fair
value of these shares, as an expense of the Public Offering resulting in a charge directly to shareholders’ equity. The
shares were issued at an estimated fair value of $1,061,640.
Stellar
Acquisition III Inc.
Notes to Financial Statements
NOTE
6 — TRUST ACCOUNT AND FAIR VALUE MEASUREMENTS
As
of November 30, 2017, investment securities in the Company Trust Account consisted of $71,215,004 in United States Treasury Bills
and another $852 held as cash and cash equivalents. As of November 30, 2016, investment securities in the Company Trust Account
consisted of $70,441,676 in United States Treasury Bills and another $939 held as cash and cash equivalents. The Company classifies
its Treasury Instruments and equivalent securities as held-to-maturity in accordance with FASB ASC 320 “Investments - Debt
and Equity Securities”. Held-to-maturity securities are those securities which the Company has the ability and intent to
hold until maturity. Held-to-maturity treasury securities are recorded at amortized cost on the accompanying November 30, 2017
and 2016 balance sheets and adjusted for amortization or accretion of premiums or discounts. The following table presents information
about the Company’s assets that are measured at fair value on a recurring basis as of November 30, 2017 and 2016 and indicates
the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In addition, the table
presents the carrying value under ASC 320, excluding accrued interest income and gross unrealized holding gain. Since all of the
Company’s permitted investments consist of U.S. government treasury bills and cash, fair values of its investments are determined
by Level 1 inputs utilizing quoted prices (unadjusted) in active markets for identical assets as follows:
|
|
Carrying
Value
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Quoted
prices in
Active
Markets
(Level 1)
|
|
U.S. Government Treasury Securities as of November 30, 2017 (maturing on February 22, 2018)
|
|
$
|
71,215,004
|
|
|
$
|
(14,157
|
)
|
|
$
|
71,229,161
|
|
U.S. Government Treasury Securities as of November 30, 2016
|
|
$
|
70,441,676
|
|
|
$
|
(5,598
|
)
|
|
$
|
70,436,078
|
|
NOTE
7 — STOCKHOLDERS’ EQUITY
Common
Stock
The
authorized common stock of the Company includes up to 200,000,000 shares. Holders of the Company’s common stock are entitled
to one vote for each share of common stock. At November 30, 2017 and 2016, there were 9,010,177 shares of common stock issued
and outstanding, including 6,192,221 and 6,293,168 shares subject to redemption, respectively.
Preferred
Stock
The
Company is authorized to issue 10,000,000 shares of preferred stock with such designations, voting and other rights and preferences
as may be determined from time to time by the Board of Directors. At November 30, 2017 and 2016, there were no shares of preferred
stock issued and outstanding.
Stellar
Acquisition III Inc. and Subsidiary
Condensed Interim Consolidated Balance Sheets
|
|
August
31,
2018
(unaudited)
|
|
|
November 30,
2017
|
|
Assets
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
|
$
|
19,223
|
|
|
$
|
117,205
|
|
Prepaid expenses
|
|
|
43,165
|
|
|
|
16,869
|
|
Total current assets
|
|
|
62,388
|
|
|
|
134,074
|
|
Cash and investments held in the Trust Account
|
|
|
19,488,870
|
|
|
|
71,215,856
|
|
Total assets
|
|
$
|
19,551,258
|
|
|
$
|
71,349,930
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
775,999
|
|
|
$
|
124,931
|
|
Accrued liabilities
|
|
|
0
|
|
|
|
12,500
|
|
Unsecured promissory notes - related parties
|
|
|
994,681
|
|
|
|
604,300
|
|
Unsecured promissory note - Phunware
|
|
|
424,549
|
|
|
|
-
|
|
Advances - related party
|
|
|
70,000
|
|
|
|
-
|
|
Total current liabilities
|
|
|
2,265,229
|
|
|
|
741,731
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
Deferred underwriting fees
|
|
|
462,930
|
|
|
|
1,725,153
|
|
Total non-current liabilities
|
|
|
462,930
|
|
|
|
1,725,153
|
|
Total Liabilities
|
|
|
2,728,159
|
|
|
|
2,466,884
|
|
Common stock subject to possible redemption: 1,123,870 and 6,192,221 shares on August 31, 2018 and November 30, 2017, respectively (at a redemption value of approximately $10.52 and $10.32 per share, respectively)
|
|
|
11,823,088
|
|
|
|
63,883,039
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred shares, $0.0001 par value, 10,000,000 shares authorized, no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.0001 par value, 200,000,000 shares authorized, 2,837,417 and 2,817,956 shares issued and outstanding on August 31, 2018 and November 30, 2017, respectively (1,123,870 and 6,192,221 shares on August 31, 2018 and November 30, 2017, respectively subject to possible redemption)
|
|
|
284
|
|
|
|
282
|
|
Additional paid-in capital
|
|
|
6,159,042
|
|
|
|
5,397,188
|
|
Accumulated deficit
|
|
|
(1,159,315
|
)
|
|
|
(397,463
|
)
|
Total shareholders’ equity
|
|
|
5,000,011
|
|
|
|
5,000,007
|
|
Total liabilities and shareholders’ equity
|
|
$
|
19,551,258
|
|
|
$
|
71,349,930
|
|
See
accompanying notes to unaudited condensed interim consolidated financial statements.
Stellar
Acquisition III Inc. and Subsidiary
Condensed Interim Consolidated Statements of Operations (unaudited)
|
|
Three
months
ended
August 31,
2018
|
|
|
Three
months
ended
August 31,
2017
|
|
|
Nine
months
ended
August 31,
2018
|
|
|
Nine
months
ended
August 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Formation and Operating costs
|
|
|
552,385
|
|
|
|
234,351
|
|
|
|
1,421,213
|
|
|
|
629,569
|
|
Loss from operations
|
|
|
(552,385
|
)
|
|
|
(234,351
|
)
|
|
|
(1,421,213
|
)
|
|
|
(629,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income –Trust Account investment income
|
|
|
163,299
|
|
|
|
168,320
|
|
|
|
659,361
|
|
|
|
368,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(389,086
|
)
|
|
$
|
(66,031
|
)
|
|
$
|
(761,852
|
)
|
|
$
|
(260,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding (excluding shares subject to possible redemption)
|
|
|
2,815,509
|
|
|
|
2,736,104
|
|
|
|
2,840,600
|
|
|
|
2,723,800
|
|
Basic and diluted net loss per share (excluding shares subject to possible redemption)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.10
|
)
|
See
accompanying notes to unaudited condensed interim consolidated financial statements.
Stellar
Acquisition III Inc. and Subsidiary
Condensed Interim Consolidated Statements of Cash Flows (unaudited)
|
|
Nine
months
ended
August 31,
2018
|
|
|
Nine
months
ended
August 31,
2017
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(761,852
|
)
|
|
$
|
(260,803
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Increase in prepaid expenses
|
|
|
(26,296
|
)
|
|
|
11,644
|
|
Increase in accounts payable
|
|
|
651,068
|
|
|
|
63,142
|
|
Decrease /(increase) in accrued liabilities
|
|
|
(12,500
|
)
|
|
|
(5,000
|
)
|
Net cash used in operating activities
|
|
|
(149,580
|
)
|
|
|
(191,017
|
)
|
Net cash used in Investing Activities
|
|
|
|
|
|
|
|
|
Cash withdrawn from Trust Account
|
|
|
52,560,319
|
|
|
|
-
|
|
Interest withdrawn from Trust Account
|
|
|
640,959
|
|
|
|
280,000
|
|
Interest income earned on Trust Account
|
|
|
(659,361
|
)
|
|
|
(368,766
|
)
|
Net cash provided by/(used in) investing activities
|
|
|
52,541,917
|
|
|
|
(88,766
|
)
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Payments for common shares redeemed
|
|
|
(52,560,319
|
)
|
|
|
-
|
|
Payments to related parties (including loans)
|
|
|
(15,246
|
)
|
|
|
-
|
|
Contributions from related parties (including loans)
|
|
|
85,246
|
|
|
|
303,300
|
|
Net cash used in financing activities
|
|
|
(52,490,319
|
)
|
|
|
303,300
|
|
Net decrease in cash
|
|
|
(97,982
|
)
|
|
|
(279,783
|
)
|
Cash at beginning of period
|
|
|
117,205
|
|
|
|
490,888
|
|
Cash at end of period
|
|
$
|
19,223
|
|
|
$
|
211,105
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities
|
|
|
|
|
|
|
|
|
Deferred underwriting fees reduction
|
|
$
|
1,262,233
|
|
|
$
|
-
|
|
Funds from related party promissory notes contributed for extension
|
|
$
|
390,381
|
|
|
$
|
-
|
|
Funds from Phunware promissory note contributed for extension
|
|
$
|
424,549
|
|
|
$
|
-
|
|
See
accompanying notes to unaudited condensed interim consolidated financial statements.
Stellar
Acquisition III Inc. and Subsidiary
Notes to Condensed Interim Consolidated Financial Statements
(unaudited)
NOTE
1 — DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Organization
and General:
Stellar
Acquisition III Inc. (the “Company” or “Stellar”) was incorporated pursuant to the laws of the Republic
of the Marshall Islands on December 8, 2015. The Company was formed for the purpose of effecting a merger, capital stock exchange,
asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (the “Business
Combination”). The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act
of 1933, as amended, or the “Securities Act,” as modified by the Jumpstart Our Business Startups Act of 2012 (the
“JOBS Act”).
On
February 27, 2018, Stellar entered into a merger agreement (the “Merger Agreement”) with Phunware Inc., a Delaware
company (“Phunware”) and STLR Merger Subsidiary Inc., a Delaware corporation and a newly formed wholly-owned subsidiary
of Stellar (“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. On or prior to the consummation of
the transactions contemplated by the Merger Agreement (the “Closing”), the holders of Phunware’s preferred stock
will convert 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) will automatically be cancelled and cease to
exist in exchange for the right to receive the Stockholder Merger Consideration, without interest; (ii) each outstanding warrant
to acquire shares of Phunware Stock will be cancelled, retired and terminated and cease to represent the right to acquire shares
of Phunware Stock 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; and (iii) each outstanding option to acquire
Phunware Stock (whether vested or unvested) shall be 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. The Merger Agreement states that the Company will use good faith
efforts to achieve a minimum of $40 million in cash, including funds in the Trust Account and proceeds from any Backstop Financing,
available to the post-transaction company. On November 1, 2018, the Company and Phunware entered into the First Amendment to the
Merger Agreement, amending the cash available to the post-transaction company of $40 million to $19 million of cash in the Trust
Account at closing (See Note 8). On April 11, 2018, Stellar filed with the SEC a registration statement on Form S-4 in connection
with the Business Combination. On June 11, 2018, the Company filed an amendment to the aforementioned registration statement.
On August 15, 2018, and October 2, 2018, the Company filed a second and third amendment to the aforementioned registration statement,
respectively. The Company anticipates having a shareholder vote and closing the transaction before the end of 2018.
The
Merger Agreement also provides that, immediately prior to the Effective Time, Stellar will convert from a Republic of the Marshall
Islands corporation to a Delaware corporation, whether by reincorporation, statutory conversion, merger or otherwise and in accordance
with the applicable provisions of the Republic of the Marshall Islands Associations Law, as amended, and the applicable provisions
of the DGCL (the “
Conversion
”). At the Closing, Stellar will change its name to “Phunware, Inc.”.
Phunware,
Inc. offers a fully integrated software platform that equips companies with the products, solutions and services necessary to
engage, manage and monetize their mobile application portfolios globally at scale. Phunware’s Multiscreen as a Service (MaaS)
platform provides the entire mobile lifecycle of applications, media and data in one login through one procurement relationship.
Its offerings include:
|
●
|
Enterprise
mobile software including content management, location-based services, marketing automation, business intelligence and analytics,
alerts, notifications and messaging, audience engagement, audience monetization, vertical solutions and cryptonetworking,
as well as an Application Framework for developers and publishers building their own mobile applications in-house;
|
Stellar
Acquisition III Inc. and Subsidiary
Notes
to Condensed Interim Consolidated Financial Statements
(unaudited)
|
●
|
Media
for mobile audience building and activation, application discovery, brand awareness, user engagement, user monetization and
more; and
|
|
●
|
Data
for audience insights, campaign engagement and business process optimization.
|
Additionally,
Phunware plans to launch PhunCoin, a blockchain-powered token and ecosystem that enables consumers, brands and application developers
to transact directly and create a value-based and voluntary data exchange.
In
connection with the proposed merger with Phunware, the Company formed a wholly-owned subsidiary, STLR Merger Subsidiary Inc.,
which was incorporated in Delaware in February 2018. Merger Sub did not have any activity as of August 31, 2018. At August 31,
2018, the Company had not commenced any operations. All activity for the period from December 8, 2015 (inception) through August
31, 2018 relates to the Company’s formation and the initial public offering (“Public Offering”) described below
and since August 24, 2016 a search for a target business with which to complete a Business Combination and activities in connection
with the proposed acquisition of Phunware. The Company will not generate any operating revenues until after completion of a Business
Combination, at the earliest. The Company will generate non-operating income in the form of interest income on cash and cash equivalents
from the proceeds derived from the Public Offering.
Going
Concern:
Following
the Company’s announcements on August 24, 2017, November 27, 2017 and February 27, 2018, regarding the first, second and
third extensions, respectively, the Company extended its time to consummate a Business Combination until May 24, 2018. On May
22, 2018, Stellar’s shareholders approved an amendment to the Company’s Second Amended and Restated Articles of Incorporation,
extending the date by which Stellar must consummate its initial business combination to August 24, 2018. On August 22, 2018, Stellar’s
shareholders approved an amendment to the Company’s Second Amended and Restated Articles of Incorporation, extending the
date by which Stellar must consummate its initial business combination to December 26, 2018.
In
connection with the Company’s assessment of going concern considerations in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Update (“ASU”) 2014-15, “Disclosures of Uncertainties about
an Entity’s Ability to Continue as a Going Concern,” management has determined that the mandatory liquidation and
subsequent dissolution raises substantial doubt about the Company’s ability to continue as a going concern. No adjustments
have been made to the carrying amounts of assets or liabilities should the Company be required to liquidate after December 26,
2018.
Sponsors
and Public Financing:
The
Company’s sponsors are Astra Maritime Inc. and Dominium Investments Inc., affiliated with the Company’s Chairman and
co-Chief Executive Officer, and Magellan Investments Corp. and Firmus Investments Inc., affiliated with our co-Chief Executive
Officer and Chief Financial Officer. All four companies were incorporated pursuant to the laws of the Republic of the Marshall
Islands (the “Sponsors”). The registration statement (the “Registration Statement”) for the Public Offering
(as described in Note 3) was declared effective by the United States Securities and Exchange Commission (the “SEC”)
on August 18, 2016. The Company intends to finance a Business Combination with the net proceeds from the $69,006,100 raised in
the Public Offering (Note 3) and the $3,985,244 private placement in each case including the partial exercise of the underwriter’s
overallotment option. Upon the closing of the Public Offering and the private placement, $70,386,222 was deposited in a Trust
Account with Continental Stock Transfer and Trust Company acting as trustee (the “Trust Account”) as discussed below.
On August 24, 2017, November 24, 2017, and February 27, 2018, the period of time the Company has to consummate a business combination
was extended by three months by increasing the minimum amount in the Trust Account by $402,536 each time, pursuant to the Company’s
prospectus in connection with the Company’s initial public offering. On May 22, 2018, Stellar’s shareholders approved
an amendment to the Company’s Second Amended and Restated Articles of Incorporation, extending the date by which Stellar
must consummate its initial business combination to August 24, 2018, or such earlier date as determined by the Company’s
board of directors, by increasing the minimum amount in the Trust Account by $124,164 each month. Concurrently, 3,353,060 Public
Shares exercised their right to redeem such Public Shares. An aggregate $34,787,998 was removed from Stellar’s Trust Account
to pay for such redemptions. On August 22, 2018, Stellar’s shareholders approved an amendment to the Company’s Second
Amended and Restated Articles of Incorporation, extending the date by which Stellar must consummate its initial business combination
to December 26, 2018, or such earlier date as determined by the Company’s board of directors, by increasing the minimum
amount in the Trust Account by $74,069 each month. Concurrently, 1,695,830 Public Shares exercised their right to redeem such
Public Shares. An aggregate $17,772,298 was removed from Stellar’s Trust Account to pay for such redemptions.
Stellar
Acquisition III Inc. and Subsidiary
Notes
to Condensed Interim Consolidated Financial Statements
(unaudited)
The
Trust Account:
The
Trust Account will be invested only in U.S. government treasury bills with a maturity of one hundred and eighty (180) days or
less or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act of 1940 which invest
only in direct U.S. government obligations. Funds will remain in the Trust Account until the earlier of (i) the consummation of
its initial Business Combination or (ii) the distribution of the Trust Account as described below. The remaining proceeds outside
the Trust Account may be used to pay for business, legal and accounting due diligence expenses for prospective acquisition targets
and continuing general and administrative expenses. The proceeds held from the Public Offering were used to invest in U.S. government
treasury bills with a maturity of one hundred and eighty (180) days or less or in money market funds meeting certain conditions
under Rule 2a-7 under the Investment Company Act of 1940 which invest only in direct U.S. government obligations. At August 31,
2018, the Trust Account consisted of US treasury bills yielding interest of approximately 1.9% per annum, with a value of $19,487,416
and another $1,454 held as cash and cash equivalents.
The
Company’s amended and restated articles of incorporation provides that, other than the withdrawal of interest to pay taxes,
if any, or working capital expenses, none of the funds held in the Trust Account will be released until the earlier of: (i) the
completion of the Business Combination; or (ii) the redemption of 100% of the shares of common stock included in the Units being
sold in the Public Offering if the Company is unable to complete a Business Combination by August 24, 2018 (subject to the requirements
of law). Since March 17, 2017, the Company has withdrawn $1,025,325 of interest earned from the Trust Account to pay for working
capital expenses, respectively. Additionally, $99,236, $101,536 and $34,168 of interest was used for the first, second and third
extensions on August 24, 2017, November 24, 2017 and February 23, 2018, respectively.
Business
Combination:
The
Company’s management has broad discretion with respect to the specific application of the net proceeds of the Public Offering,
although it initially intends to focus its efforts within the international energy logistics industry. Substantially all of the
net proceeds of the Public Offering and the private placement are intended to be generally applied toward consummating a Business
Combination with (or acquisition of) a Target Business. As used herein, “Target Business” means one or more target
businesses that together have a fair market value equal to at least 80% of the balance in the Trust Account (less any deferred
underwriting commissions and taxes payable on interest earned) at the time of the Company signing a definitive agreement in connection
with the Business Combination. There is no assurance that the Company will be able to successfully effect a Business Combination.
The
Company, after signing a definitive agreement for a Business Combination, will either (i) seek stockholder approval of the Business
Combination at a meeting called for such purpose in connection with which shareholders may seek to redeem their shares, regardless
of whether they vote for or against the Business Combination, for cash equal to their pro rata share of the aggregate amount then
on deposit in the Trust Account as of two business days prior to the consummation of the initial Business Combination, including
interest but less taxes payable or amounts released to the Company for working capital, or (ii) provide shareholders with the
opportunity to sell their shares to the Company by means of a tender offer (and thereby avoid the need for a stockholder vote)
for an amount in cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account as of two business
days prior to commencement of the tender offer, including interest but less taxes payable or amounts released to the Company for
working capital. The decision as to whether the Company will seek stockholder approval of the Business Combination or will allow
shareholders to redeem their shares in a tender offer will be made by the Company, solely in its discretion, and will be based
on a variety of factors such as whether the Company is a foreign private issuer, the timing of the transaction and whether the
terms of the transaction would otherwise require the Company to seek stockholder approval unless a vote is required by NASDAQ
rules. If the Company seeks stockholder approval, it will complete its Business Combination only if a majority of the outstanding
shares of common stock voted are voted in favor of the Business Combination. However, in no event will the Company redeem its
Public Shares in an amount that would cause its net tangible assets to be less than $5,000,001 upon consummation of the initial
Business Combination. In such case, the Company would not proceed with the redemption of its Public Shares and the related Business
Combination, and instead may search for an alternate Business Combination.
Stellar
Acquisition III Inc. and Subsidiary
Notes
to Condensed Interim Consolidated Financial Statements
(unaudited)
If
the Company holds a shareholder vote or there is a tender offer for shares in connection with a Business Combination, a public
shareholder will have the right to redeem its shares for an amount in cash equal to their pro rata share of the aggregate amount
then on deposit in the Trust Account as of two business days prior to the consummation of the initial Business Combination, including
interest but less taxes payable or amounts released to the Company for working capital purposes. As a result, such shares of common
stock have been recorded at redemption amount and classified as temporary equity upon the completion of the Public Offering, in
accordance with FASB ASU 480, “Distinguishing Liabilities from Equity.” The amount in the Trust Account is initially
$10.20 per public common share ($70,386,222 held in the Trust Account divided by 6,900,610 public common shares), subject to increase
of up to an additional $0.175 per unit in the event that the Sponsors elect to extend the period of time to consummate a Business
Combination, as described in more detail below. As of August 31, 2018, the minimum amount in the Trust Account was approximately
$10.52 per public common share ($19,480,095 held in the Trust Account divided by 1,851,720 public common shares).
The
Company has until December 26, 2018, to complete a Business Combination. If the Company does not complete a Business Combination
within this period of time, it shall (i) cease all operations except for the purposes of winding up; (ii) as promptly as reasonably
possible, but not more than ten business days thereafter, redeem the Public Shares of common stock for a per share pro rata portion
of the Trust Account, including interest, but less taxes payable or amounts released to the Company for working capital (less
up to $50,000 of such net interest to pay dissolution expenses) and (iii) as promptly as possible following such redemption, dissolve
and liquidate the balance of the Company’s net assets to its remaining shareholders, as part of its plan of dissolution
and liquidation. The initial shareholders have entered into letter agreements with the Company, pursuant to which they have waived
their rights to participate in any redemption with respect to their founder shares; however, if the initial shareholders or any
of the Company’s officers, directors or affiliates acquire shares of common stock in or after the Public Offering, they
will be entitled to a pro rata share of the Trust Account upon the Company’s redemption or liquidation with respect to such
shares in the event the Company does not complete a Business Combination within the required time period.
In
the event of such distribution, it is possible that the per share value of the residual assets remaining available for distribution
(including Trust Account assets) will be less than the initial public offering price per Unit in the Public Offering.
Stellar
Acquisition III Inc. and Subsidiary
Notes
to Condensed Interim Consolidated Financial Statements
(unaudited)
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation:
The
accompanying unaudited condensed interim consolidated financial statements are presented in U.S. dollars in conformity with accounting
principles generally accepted in the United States of America (“GAAP”) for interim information and in
accordance with the instructions to Form 10-Q and Article 8 and Article 10 of Regulation S-X. Accordingly, since they are interim
statements, the accompanying consolidated financial statements do not include all of the information and notes required by GAAP
for a complete consolidated financial statement presentation. In the opinion of management, the interim consolidated financial
statements reflect all adjustments (consisting of normal, recurring adjustments) that are necessary for a fair presentation of
the financial position, results of consolidated operations and cash flows for the interim periods presented. Interim results are
not necessarily indicative of results for a full year and pursuant to the rules and regulations of the SEC.
Principles
of Consolidation:
The
accompanying condensed interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary.
All significant intercompany balances and transactions have been eliminated in consolidation.
Emerging
Growth Company:
Section
102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting
standards until private companies (that is, those that have not had a Securities Act registration statement declared effective
or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial
accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with
the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has
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, the Company, as an emerging growth company, can adopt the new or revised standard
at the time private companies adopt the new or revised standard.
Net
Loss per Ordinary Share
Net
loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding, ineligible
for redemption, during the period, plus to the extent dilutive, the incremental number of shares of common stock to settle warrants,
as calculated using the treasury stock method. At August 31, 2018, the Company had outstanding warrants to purchase 14,871,098
shares. For all periods presented, these shares were excluded from the calculation of diluted loss per share of common stock because
their inclusion would have been antidilutive. As a result, diluted loss per common share is the same as basic loss per common
share for all periods presented.
Concentration
of Credit Risk:
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution
in Cyprus, which has no deposit insurance. The Company has not experienced losses on these accounts and management believes the
Company is not exposed to significant risks on such accounts.
Fair
Value of Financial Instruments:
The
fair value of the Company’s assets and liabilities, which qualify as financial instruments under FASB ASC 820, “Fair
Value Measurements and Disclosures,” approximates the carrying amounts represented in the consolidated balance sheets.
Use
of Estimates:
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual
results could differ from those estimates.
Stellar
Acquisition III Inc. and Subsidiary
Notes
to Condensed Interim Consolidated Financial Statements
(unaudited)
Cash
and securities held in Trust Account:
At
August 31, 2018 and November 30, 2017, the assets held in the Trust Account were held in cash and U.S. Treasury Bills. Since March
17, 2017, the Company has withdrawn $1,025,325 of interest earned from the Trust Account to pay for operating expenses. Additionally,
$99,236, $101,536 and $34,168 of interest was used for the first, second and third extensions on August 24, 2017, November 24,
2017, and February 23, 2018, respectively.
Income
Taxes:
There
is, at present, no direct taxation in the Marshall Islands and interest, dividends, and gains payable to the Company are received
free of all Marshall Islands taxes. The Company is registered as an “exempted company” pursuant to the Marshall Islands
Business Corporations Act (as amended). As the Company proceeds with making investments in various jurisdictions, tax considerations
outside the Marshall Islands may arise. Although the Company intends to pursue tax-efficient investments, it may be subject to
income tax, withholding tax, capital gains tax, and other taxes imposed by tax authorities in other jurisdictions. For U.S. tax
purposes, the Company expects to be treated as a passive foreign investment company by its U.S. shareholders. The Company does
not expect to be subject to direct taxation based on net income in the U.S. as long as it maintains its non-U.S. trade or business
status. The Company does not expect to invest in any U.S. obligation that will be subject to U.S. withholding taxes. As of August
31, 2018, the Company has not commenced operations and thus has no uncertain tax positions. There were no adjustments related
to uncertain tax positions recognized during the period December 8, 2015 (inception) to August 31, 2018.
The
Company follows the provisions of FASB ASC 740-10 which prescribes a recognition threshold and measurement attribute for how a
company should recognize, measure, present and disclose in its consolidated financial statements uncertain tax positions that
the Company has taken or expects to take on its tax return. FASB ASC 740-10 requires that the consolidated financial statements
reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position
and all relevant facts, but without considering time values.
Redeemable
Common Stock:
As
discussed in Note 3, all common shares sold as part of a Unit in the Public Offering contain a redemption feature which allows
for the redemption of common shares under the Company’s Liquidation or Tender offer/stockholder/approval provisions. In
accordance with FASB ASC 480, redemption provisions not solely within the control of the Company require the security to be classified
outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of an entity’s
equity instruments, are excluded from the provisions of FASB ASC 480. Although the Company did not specify a maximum redemption
threshold, its charter provides that in no event will it redeem its Public Shares in an amount that would cause its net tangible
assets (shareholders’ equity) to be less than $5,000,001.
The
Company recognizes changes in redemption value immediately as they occur and will adjust the carrying value of the security to
equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common
stock shall be affected by charges against additional paid-in capital.
Accordingly,
at August 31, 2018 and November 30, 2017, 1,123,870 and 6,192,221 of the 1,851,720 and 6,900,610 Public Shares were classified
outside of permanent equity at their redemption value, respectively.
Recent
Accounting Pronouncements:
Management
does not believe there are any recently issued, but not yet effective, accounting pronouncements, that if currently adopted, would
have a material effect on the Company’s consolidated financial statements.
Stellar
Acquisition III Inc. and Subsidiary
Notes
to Condensed Interim Consolidated Financial Statements
(unaudited)
NOTE
3 — PUBLIC OFFERING
On
August 24, 2016, the Company closed the Public Offering for the sale of 6,500,000 units at a price of $10.00 per unit (the “Units”).
Each Unit consists of one share of the Company’s common stock, $0.0001 par value (the “Public Shares”) and one
redeemable common stock purchase warrant (the “Warrants”). Under the terms of a warrant agreement, the Company has
agreed to use its best efforts to file a new registration statement under the Securities Act to register the shares of common
stock underlying the Warrants, following the completion of the Business Combination. Each Warrant entitles the holder to purchase
one share of common stock at a price of $11.50. No fractional shares will be issued upon exercise of the Warrants. If, upon exercise
of the Warrants, a holder would be entitled to receive a fractional interest in a share, the Company will, upon exercise, round
down to the nearest whole number the number of shares of common stock to be issued to the Warrant holder. Each Warrant will become
exercisable on the later of 30 days after the completion of the Business Combination or 12 months from the closing of the Public
Offering and will expire five years after the completion of the Business Combination or earlier upon redemption or liquidation.
However, if the Company does not complete its initial Business Combination on or prior to the applicable time period to complete
the Business Combination, the Warrants will expire at the end of such period. If the Company is unable to deliver registered shares
of common stock to the holder upon exercise of Warrants issued in connection with the Company’s public Units during the
exercise period, there will be no net cash settlement of these Warrants and the Warrants will expire worthless, unless they may
be exercised on a cashless basis in the circumstances described in the warrant agreement. Once the Warrants become exercisable,
the Company may redeem the outstanding Warrants in whole and not in part at a price of $0.01 per Warrant upon a minimum of 30
days’ prior written notice of redemption, only in the event that the last sale price of the Company’s shares of common
stock equals or exceeds $21.00 per share for any 20 trading days within the 30-trading day period ending on the third trading
day before the Company sends the notice of redemption to the Warrant holders.
The
Company granted the underwriters an overallotment option to purchase an additional 975,000 Units at $10.00 for 45 days following
the closing of the Public Offering. Following the partial exercise of the underwriters’ overallotment option on September
28, 2016, the Company sold an additional 400,610 Units at a price of $10.00 per unit generating additional gross proceeds of $4,006,100.
The Company paid an underwriting fee of $1,300,000, equal to a 2.00% underwriting discount on the per Unit offering price to the
underwriters, based on a sale of 6,500,000 Units, at the closing of the Public Offering and $80,122 based on a sale of 400,610
Units, following the partial exercise of the underwriters’ overallotment option on September 28, 2016. The Company will
pay an additional fee (the “Deferred Discount”) of 2.5% of the gross offering proceeds payable to underwriters, reduced
pro rata for any share redemptions, upon the Company’s completion of a Business Combination. The Deferred Discount will
become payable to the underwriters from the amounts held in the Trust Account solely in the event the Company completes its initial
Business Combination.
The
Company issued the underwriters, as additional compensation for the Public Offering, 100,000 shares at the close of the Public
Offering. Following the partial exercise of the underwriters’ overallotment option on September 28, 2016, the Company issued
the underwriters, as additional compensation for the Public Offering, another 6,164 shares. The Company accounted for the fair
value of these shares, as an expense of the Public Offering resulting in a charge directly to shareholders’ equity. The
shares were issued at an estimated fair value of $1,061,640.
Stellar
Acquisition III Inc. and Subsidiary
Notes
to Condensed Interim Consolidated Financial Statements
(unaudited)
NOTE
4 — RELATED PARTY TRANSACTIONS
Founder
Shares
The
Company’s initial shareholders currently own 2,003,403 shares of common stock, following the partial exercise of the underwriters’
overallotment option on September 28, 2016. In January 2016, 2,300,000 shares were initially purchased by Messrs. Tsirigakis and
Syllantavos for an aggregate of $25,000, up to 300,000 of which were subject to forfeiture. In January 2016, Messrs. Tsirigakis
and Syllantavos collectively transferred an aggregate of 2,099,900 shares to the Sponsors and an aggregate of 34,500 shares to
the Company’s director nominees. In addition, in January 2016, Messrs. Tsirigakis and Syllantavos collectively transferred
an aggregate of 165,600 shares to the Company’s other initial shareholders. In August 2016, the Sponsors returned to the
Company, at no cost, an aggregate of 129,839 founder shares, which the Company cancelled, leaving an aggregate of 2,170,161 founder
shares outstanding. Following the partial exercise of the underwriters’ overallotment option on September 28, 2016, the
Sponsors returned to the Company, at no cost, an aggregate of 166,758 founder shares, which the Company cancelled, leaving an
aggregate of 2,003,403 founder shares outstanding. The founder shares are identical to the common stock included in the Units
sold in the Public Offering except that the founder shares are subject to certain transfer restrictions, as described in more
detail below. The Company’s initial shareholders currently own 35.4% of the Company’s issued and outstanding shares
of common stock.
The
Company’s initial shareholders have agreed not to transfer, assign or sell any of their founder shares until the earlier
of (A) one year after the completion of the Business Combination, or earlier if, subsequent to the Business Combination, the last
sale price of the Company’s common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends,
reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least
150 days after the Business Combination or (B) the date on which the Company completes a liquidation, merger, stock exchange or
other similar transaction after the initial Business Combination that results in all of the Company’s shareholders having
the right to exchange their shares of common stock for cash, securities or other property.
Private
Placement Warrants
Upon
the closing of the Public Offering on August 24, 2016, the Sponsors paid the Company $3,825,000 in a private placement for the
purchase of an aggregate of 7,650,000 Warrants at a price of $0.50 per Warrant (the “Private Placement Warrants”).
Following the partial exercise of the underwriters’ overallotment option on September 28, 2016, the Sponsors purchased 320,488
additional Private Placement Warrants for an aggregate price of $160,244. Each Private Placement Warrant entitles the holder to
purchase one share of common stock at $11.50 per share. The proceeds from the sale of the Private Placement Warrants have been
added to the proceeds from the Public Offering held in the Trust Account pending completion of the Business Combination. The Private
Placement Warrants (including the common stock issuable upon exercise of the Private Placement Warrants) will not be transferable,
assignable or salable until 30 days after the completion of the initial Business Combination and they will be non-redeemable so
long as they are held by the Sponsors or their permitted transferees. If the Private Placement Warrants are held by someone other
than the Sponsors or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable
by such holders on the same basis as the Warrants included in the Units being sold in the Public Offering. Otherwise, the Private
Placement Warrants have terms and provisions that are identical to those of the Warrants sold as part of the Units in the Public
Offering and have no net cash settlement provisions.
If
the Company does not complete a Business Combination, then the proceeds will be part of the liquidating distribution to the Public
Shareholders and the Warrants issued to the Sponsors will expire worthless.
Registration
Rights
The
Company’s initial shareholders and holders of the Private Placement Warrants are entitled to registration rights pursuant
to a registration rights agreement executed on August 18, 2016. The Company’s initial shareholders and holders of the Private
Placement Warrants are entitled to make up to three demands, excluding short form registration demands, that the Company register
such securities for sale under the Securities Act. In addition, these holders have “piggy-back” registration rights
to include their securities in other registration statements filed by the Company. The Company will bear the expenses incurred
in connection with the filing of any such registration statements. There are no penalties associated with delays in registering
the securities under the registration rights agreement.
Stellar
Acquisition III Inc. and Subsidiary
Notes
to Condensed Interim Consolidated Financial Statements
(unaudited)
Related
Party Loans
As
of January 15, 2016, three of the Company’s Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments
Corp., have agreed to loan the Company an aggregate of $250,000 against the issuance of an unsecured promissory note (the “Note”)
to cover expenses related to the Public Offering. Between January and August 2016, the Company borrowed approximately $207,985
under this loan from the three Sponsors. These loans were non-interest bearing and were paid in full on August 24, 2016. Additionally,
between January and August 2016 Nautilus Energy Management Corp., an affiliate of the Company’s co-Chief Executive Officers
paid for certain expenses related to the Company’s roadshow and offering amounting to $42,550. Nautilus Energy Management
Corp. was reimbursed for these expenses in full on August 24, 2016.
On
August 24, 2017, the Company issued unsecured promissory notes (the “First Extension Notes”) in the aggregate amount
of $303,300 to three of the Company’s Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments Corp.,
affiliates of our co-CEOs, Mr. Prokopios (Akis) Tsirigakis, and of Mr. George Syllantavos. Of the aggregate amount of $303,300
received, $65,000 is held outside of a financial institution in cash on hand at the Company and is expected to be deposited in
the Company’s operating cash account. The Trust Account was funded properly for the extension. These funds, which were deposited
into the Trust Account, were used to extend the period of time the Company has to consummate a business combination by three months
to November 24, 2017.
On
November 23, 2017, the Company issued unsecured promissory notes (the “Second Extension Notes”) in the aggregate amount
of $301,000 to three of the Company’s Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments Corp.,
affiliates of our co-CEOs, Mr. Prokopios (Akis) Tsirigakis, and of Mr. George Syllantavos. These funds, which were deposited into
the Trust Account, were used to extend the period of time the Company has to consummate a business combination by three months
to February 24, 2018.
On
February 23, 2018, the Company issued unsecured promissory notes in the aggregate amount of $167,100 to three of the Company’s
Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments Corp., affiliates of our co-CEOs, Mr. Prokopios
(Akis) Tsirigakis, and of Mr. George Syllantavos. Additionally, on February 22, 2018 the Company issued a promissory note in the
aggregate amount of $201,268 to Phunware. The promissory note payable to Phunware bears no interest, and is payable on the earlier
of (a) the date of consummation of the merger pursuant to the terms of the Merger Agreement, (b) the date that the Company consummates
its initial business combination, or (c) the date of liquidation of the Company. The aggregate funds from the four aforementioned
promissory notes (collectively the “Third Extension Notes”), which were deposited into the Trust Account, were used
to extend the period of time the Company has to consummate a business combination by three months to May 24, 2018.
On
each of May 22, 2018, June 22, 2018, and July 23, 2018, Stellar issued unsecured promissory notes in the aggregate amount of $62,082
to three of the Company’s Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments Corp., affiliates
of our co-CEOs, Mr. Prokopios (Akis) Tsirigakis, and of Mr. George Syllantavos. Additionally, each of May 22, 2018, June 22, 2018,
and July 23, 2018, the Company issued a promissory note in the aggregate amount of $62,082 to Phunware (collectively the “Fourth
Extension Notes”).
On
each of August 23, 2018, and September 24, 2018, Stellar issued unsecured promissory notes in the aggregate amount of $37,034
each time to three of the Company’s Sponsors, Firmus Investments Inc., Astra Maritime, Inc. and Magellan Investments Corp.,
affiliates of our co-CEOs, Mr. Prokopios (Akis) Tsirigakis, and of Mr. George Syllantavos. Additionally, on August 23, 2018, and
September 24, 2018, the Company issued promissory notes in the aggregate amount of $37,034 each time to Phunware (collectively
the “Fifth Extension Notes”).
Stellar
Acquisition III Inc. and Subsidiary
Notes
to Condensed Interim Consolidated Financial Statements
(unaudited)
As
of August 31, 2018, the outstanding loans to related parties amounted to $994,681 and the outstanding loans to Phunware amounted
to $424,549.
The
First Extension Notes, the Second Extension Notes, the Third Extension Notes, the Fourth Extension Notes and the Fifth Extension
Notes (the “Extension Notes”) bear no interest and are repayable in full upon consummation of the Company’s
initial business combination. The Sponsors have the option to convert any unpaid balance of the Notes into warrants exercisable
for shares of the Company’s common stock, based on a conversion price of $0.50 per warrant. The terms of any such warrants
shall be identical to the terms of the warrants issued pursuant to the private placement that was consummated by the Company in
connection with the Company’s initial public offering.
As
of August 31, 2018, the Company had $70,000 of outstanding invoices to Nautilus Energy Management Corp.
Administrative
Service Agreement and Services Agreement
The
Company has agreed to pay $10,000 a month for office space, administrative services and secretarial support to Nautilus Energy
Management Corp., an affiliate of our co-Chief Executive Officers. Services commenced on the date the securities were first listed
on the NASDAQ Capital Market on August 19, 2016 and will terminate upon the earlier of the consummation by the Company of an initial
Business Combination or the liquidation of the Company. For the period from December 5, 2015 (inception) through August 31, 2018,
the Company paid $244,194 under this agreement, $90,000 of which was for the nine months ended August 31, 2018.
NOTE
5 — COMMITMENTS AND CONTINGENCIES
The
Company paid an underwriting fee of $1,300,000, equal to a 2.00% underwriting discount on the per Unit offering price to the underwriters,
based on a sale of 6,500,000 Units, at the closing of the Public Offering. Following the partial exercise of the underwriters’
overallotment option on September 28, 2016, the Company paid an additional underwriting fee of $80,122. The Company will pay an
additional fee (the “Deferred Discount”) of 2.5% of the gross offering proceeds payable to underwriters, reduced pro
rata for any share redemptions, upon the Company’s completion of a Business Combination. The Deferred Discount will become
payable to the underwriters from the amounts held in the Trust Account solely in the event the Company completes its initial Business
Combination. On August 31, 2018, and November 30, 2017, the Deferred Discount amounted to $462,930 and $1,725,153, respectively.
The reduction was due to the redemption of 3,353,060 and 1,695,830 shares that took place in May 22, 2018 and August 22, 2018,
respectively.
The
Company sold to the underwriters for $100, an option to purchase up to a total of 130,000 units, exercisable at $11.50 per unit
(or an aggregate exercise price of $1,495,000) upon the closing of the Public Offering. The purchase option may be exercised for
cash or on a cashless basis, at the holder’s option, at any time during the period commencing on the later of the first
anniversary of the effective date of the Registration Statement and the closing of our initial Business Combination and terminating
on the fifth anniversary of such effectiveness date. The units issuable upon exercise of this option are identical to those offered
in the Public Offering. The Company accounted for the fair value of the unit purchase option, net of the receipt of the $100 cash
payment, as an expense of the Public Offering resulting in a charge directly to shareholders’ equity. The Company estimates
the fair value of this unit purchase option is $6.01 per unit (for a total fair value of approximately $781,000) using a Black-Scholes
option-pricing model. The fair value of the unit purchase option granted to the underwriter is estimated as of the date of grant
using the following assumptions: (1) expected volatility of 37.8% (2) risk-free interest rate of 1.83% and (3) expected life of
5 years. Because the Company’s units do not have a trading history, the volatility assumption is based on information currently
available to management. The volatility assumption was calculated using the average volatility of stock prices of a selection
of companies within the energy logistics space, which are representative of the sectors on which the company intends to focus
for the initial business transaction, including: Arc Logistics Partners LP, Ardmore Shipping Corporation, Blueknight Energy Partners,
L.P., Buckeye Partners, L.P., Cheniere Energy, Inc., DHT Holdings, Inc., Dorian LPG Ltd., EnLink Midstream, LLC, GasLog Ltd.,
Genesis Energy LP, Golar LNG Ltd., Kinder Morgan, Inc., Magellan Midstream Partners LP, Navigator Holdings Ltd., Nordic American
Tankers Limited, NuStar GP Holdings, LLC, ONEOK Inc., PBF Logistics LP, Scorpio Tankers Inc., StealthGas, Inc., Teekay Tankers
Ltd., Tsakos Energy Navigation Limited. The Company believes that the volatility estimate is a reasonable benchmark to use in
estimating the expected volatility of the units. Although an expected life of five years was used in the calculation, if the Company
does not consummate a Business Combination within the prescribed time period and it liquidates, the option will become worthless.
The unit purchase option may be exercised for cash or on a “cashless” basis, at the holder’s option, such that
the holder may use the appreciated value of the unit purchase option (the difference between the exercise prices of the unit purchase
option and the underlying Warrants and the market price of the Units and underlying ordinary shares) to exercise the unit purchase
option without the payment of cash.
Stellar
Acquisition III Inc. and Subsidiary
Notes
to Condensed Interim Consolidated Financial Statements
(unaudited)
The
Company issued the underwriters, as additional compensation for the Public Offering, 100,000 shares at the close of the Public
Offering. Following the partial exercise of the underwriters’ overallotment option on September 28, 2016, the Company issued
the underwriters, as additional compensation for the Public Offering, another 6,164 shares. The Company accounted for the fair
value of these shares, as an expense of the Public Offering resulting in a charge directly to shareholders’ equity. The
shares were issued at an estimated fair value of $1,061,640.
NOTE
6 — TRUST ACCOUNT AND FAIR VALUE MEASUREMENTS
As
of August 31, 2018, investment securities in the Company’s Trust Account consisted of $19,487,416 in United States Treasury
Bills and another $1,454 held as cash and cash equivalents. As of November 30, 2017, investment securities in the Company’s
Trust Account consisted of $71,215,004 in United States Treasury Bills and another $852 held as cash and cash equivalents. The
Company classifies its Treasury Instruments and equivalent securities as held-to-maturity in accordance with FASB ASC 320 “Investments
- Debt and Equity Securities”. Held-to-maturity securities are those securities which the Company has the ability and intent
to hold until maturity. Held-to-maturity treasury securities are recorded at amortized cost on the accompanying August 31, 2018
and November 30, 2017 consolidated balance sheet and adjusted for amortization or accretion of premiums or discounts. The following
table presents information about the Company’s assets that are measured at fair value on a recurring basis as of August
31, 2018 and November 30, 2017 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine
such fair value. In addition, the table presents the carrying value under ASC 320, excluding accrued interest income and gross
unrealized holding gain. Since all of the Company’s permitted investments consist of U.S. government treasury bills and
cash, fair values of its investments are determined by Level 1 inputs utilizing quoted prices (unadjusted) in active markets for
identical assets as follows:
|
|
Carrying
Value
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Quoted
prices in
Active
Markets
(Level 1)
|
|
U.S. Government Treasury Securities as of August 31, 2018 (maturing on September 20, 2018)
|
|
$
|
19,487,416
|
|
|
$
|
(4,002
|
)
|
|
$
|
19,491,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury Securities as of November 30, 2017
|
|
$
|
71,215,004
|
|
|
$
|
(14,157
|
)
|
|
$
|
71,229,161
|
|
NOTE
7 — SHAREHOLDERS’ EQUITY
Common
Stock
The
authorized common stock of the Company includes up to 200,000,000 shares. Holders of the Company’s common stock are entitled
to one vote for each share of common stock. At August 31, 2018 and November 30, 2017, there were 3,961,287 and 9,010,177 shares
of common stock issued and outstanding, including 1,123,870 and 6,192,221 shares subject to possible redemption, respectively.
Preferred
Stock
The
Company is authorized to issue 10,000,000 shares of preferred stock with such designations, voting and other rights and preferences
as may be determined from time to time by the Board of Directors. At August 31, 2018 and November 30, 2017, there were no shares
of preferred stock issued and outstanding.
NOTE
8 — SUBSEQUENT EVENTS
On
November 1, 2018, the Company and Phunware entered into the First Amendment to the Merger Agreement, amending the cash available
to the post-transaction company of $40 million to $19 million of cash in the Trust Account at closing.
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following table sets forth all expenses to be paid by the Registrant, other than underwriting discounts and commissions, in connection
with this offering. All amounts shown are estimates.
SEC registration fee
|
|
$
|
221,290.55
|
FINRA filing fee
|
|
|
-
|
Exchange listing fee
|
|
|
*
|
Printing and engraving
|
|
|
*
|
Legal fees and expenses
|
|
|
*
|
Accounting fees and expenses
|
|
|
*
|
Blue sky fees and expenses (including legal fees)
|
|
|
*
|
Transfer agent and registrar fees
|
|
|
*
|
Miscellaneous
|
|
|
*
|
Total
|
|
$
|
*
|
|
*
|
To
be completed by amendment.
|
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As
permitted by Section 102 of the Delaware General Corporation Law, we have adopted provisions in our amended and restated
certificate of incorporation and amended and restated bylaws that limit or eliminate the personal liability of our directors for
a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the
corporation, directors exercise an informed business judgment based on all material information reasonably available to them.
Consequently, a director will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability for:
|
●
|
any
breach of the director’s duty of loyalty to us or our stockholders;
|
|
●
|
any
act or omission not in good faith or that involves intentional misconduct or a knowing
violation of law;
|
|
●
|
any
act related to unlawful stock repurchases, redemptions or other distributions or payment
of dividends; or
|
|
●
|
any
transaction from which the director derived an improper personal benefit.
|
These
limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. Our amended
and restated certificate of incorporation also authorizes us to indemnify our officers, directors and other agents to the fullest
extent permitted under Delaware law.
As
permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws provide that:
|
●
|
we
may indemnify our directors, officers and employees to the fullest extent permitted by
the Delaware General Corporation Law, subject to limited exceptions;
|
|
●
|
we
may advance expenses to our directors, officers and employees in connection with a legal
proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject
to limited exceptions; and
|
|
●
|
the
rights provided in our amended and restated bylaws are not exclusive.
|
Our
amended and restated certificate of incorporation and our amended and restated bylaws provide for the indemnification provisions
described above and elsewhere herein. We have entered into separate indemnification agreements with our directors and officers
that may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification
agreements generally require us, among other things, to indemnify our directors and officers against liabilities that may arise
by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct. These indemnification
agreements also generally require us to advance any expenses incurred by the directors or officers as a result of any proceeding
against them as to which they could be indemnified. In addition, we have purchased a policy of directors’ and officers’
liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment in
some circumstances. These indemnification provisions and the indemnification agreements may be sufficiently broad to permit indemnification
of directors and officers for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933,
as amended, or the Securities Act.
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES.
The
following list sets forth information as to all Phunware and our securities sold in the last three years which were not registered
under the Securities Act. The descriptions of Phunware issuances are historical and have not been adjusted to give effect to the
business combination.
Stock
Issuances
On
December 26, 2018, the Registrant issued an aggregate of 6,000 shares of its Series A convertible preferred stock at a purchase
price of $1,000 per share, for an aggregate purchase price of $6 million, to one entity.
Plan-Related
Issuances
From
December 27, 2015 through December 26, 2018, Phunware granted to its officers, directors, employees, consultants and other service
providers options to purchase an aggregate of 5,740,200 shares of its common stock under the Registrant’s 2009 Equity Incentive
Plan at exercise prices ranging from $0.20 to $1.06 per share.
None
of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering. The Registrant
believes these transactions were exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities
Act (or Regulation D or Regulation S promulgated thereunder), or Rule 701 promulgated under Section 3(b) of
the Securities Act as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating
to compensation as provided under Rule 701. The recipients of the securities in each of these transactions represented their
intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution
thereof, and appropriate legends were placed upon the stock certificates issued in these transactions. All recipients had adequate
access, through their relationships with us, to information about the Registrant.
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)
Exhibits
.
We have filed the exhibits listed on the accompanying Exhibit Index of this Registration Statement.
EXHIBIT
INDEX
Exhibit
No.
|
|
Description
|
2.1*†
|
|
Agreement and Plan of Merger, dated February 27, 2018, by and among Stellar, STLR Merger Subsidiary Inc. and Phunware, Inc (Incorporated by reference to Exhibit 2.1 of Stellar’s Form 8-K (File No. 001-37862), filed with the SEC on February 28, 2018, and also included as Annex C to the joint proxy statement/prospectus).
|
2.2*
|
|
First Amendment to Agreement and Plan of Merger, dated November 1, 2018, by and among Stellar, Phunware, Inc. and the Holder Representative named therein (Incorporated by reference to Annex C-1 to Stellar’s Form S-4/A (File No. 333-224227), filed with the SEC on November 13, 2018).
|
3.1*
|
|
Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
|
3.2*
|
|
Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
|
4.1*
|
|
Specimen common stock certificate of the Registrant (Incorporated by reference to Exhibit 4.3 of Stellar’s Form S-4/A (File
No. 333-224227), filed with the SEC on November 6, 2018)
.
|
4.3*
|
|
Warrant Agreement, dated August 18, 2016, between Continental Stock Transfer & Trust Company and Stellar (Incorporated by reference to Exhibit 4.1 of Stellar’s Form 8-K (File No. 001-37862), filed with the SEC on August 24, 2016).
|
4.4*
|
|
Second Amended and Restated Sponsor Warrant Purchase Agreement, dated August 12, 2016 among Stellar and certain security holders (Incorporated by reference to Exhibit 10.9 of Stellar’s Form S-1/A (File No. 333-212377), filed with the SEC on August 15, 2016).
|
4.5*
|
|
Registration Rights Agreement, dated August 18, 2016, between Stellar and certain security holders (Incorporated by reference to Exhibit 10.2 of Stellar’s Form 8-K (File No. 001-37862), filed with the SEC on August 24, 2016).
|
4.6*
|
|
Form of Securities Subscription Agreement, dated January 29, 2016, among Stellar and certain security holders (Incorporated by reference to Exhibit 10.7 of Stellar’s Form S-1 (File No. 333-212377), filed with the SEC on June 30, 2016).
|
4.7
|
|
Amended and Restated Investors’ Rights Agreement, as amended, between Phunware, Inc. and certain holders of Phunware, Inc.’s capital stock named therein.
|
4.8*
|
|
Form of Warrant to Purchase Shares of Series F Preferred Stock and Phuncoins of Phunware, Inc. (Incorporated by reference to Exhibit 10.22 of Stellar’s Form S-4/A (File No. 333-224227), filed with the SEC on October 2, 2018)
|
4.9*
|
|
Securities Purchase Agreement, dated December 26, 2018, between the Stellar and the Purchaser, dated January 29, 2016, among Stellar and certain security holders (Incorporated by reference to Exhibit 10.9 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
|
4.10*
|
|
Registration Rights Agreement, dated December 26, 2018, between the Stellar and the Purchaser, dated January 29, 2016, among Stellar and certain security holders (Incorporated by reference to Exhibit 10.10 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
|
5.1**
|
|
Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
|
10.1*
|
|
Form of Indemnification Agreement between the Successor and its directors and officers (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
|
10.2+*
|
|
Phunware, Inc. 2018 Equity Incentive Plan, including form agreements under the 2018 Equity Incentive Plan (Incorporated by reference to Annex D to Stellar’s Form S-
4/A (File No. 333-224227), filed with the SEC on November 13, 2018
).
|
10.3+*
|
|
Phunware, Inc. 2018 Employee Stock Purchase Plan, including form agreements under the 2018 Employee Stock Purchase Plan (Incorporated by reference to Annex E to Stellar’s Form S-
4/A (File No. 333-224227), filed with the SEC on November 13, 2018)
.
|
10.4+*
|
|
Phunware, Inc. 2009 Equity Incentive Plan, including form agreements under the 2009 Equity Incentive Plan (Incorporated by reference to Exhibit 10.15 of Stellar’s Form S-4 (File
No. 333-224227), filed with the SEC on April 11, 2018)
.
|
10.5+*
|
|
Property Lease commencing on November 1, 2011 with HUB Properties Trust for premises located at 7800 Shoal Creek Blvd., Suite-230S, Austin, TX 78757, as amended by First Amendment to Property Lease dated September 6, 2012, and Second Amendment to Property Lease dated July 3, 2013 (Incorporated by reference to Exhibit 10.16 of Stellar’s Form S-4 (File
No. 333-224227), filed with the SEC on April 11, 2018)
.
|
10.6+*
|
|
Factoring Agreement with CSNK Working Capital Finance Corp d/b/a Bay View Funding dated June 14, 2016, as amended by Amendment No. 1 to Factoring Agreement dated June 22, 2016 (Incorporated by reference to Exhibit 10.17 of Stellar’s Form S-4 (File
No. 333-224227), filed with the SEC on April 11, 2018)
.
|
10.7*
|
|
Form of Voting Agreement (Incorporated by reference to Exhibit 10.1 of Stellar’s Form 8-K (file No. 001-37862), filed with the SEC on February 28, 2018).
|
10.8*
|
|
Form of Sponsor Voting Agreement (Incorporated by reference to Exhibit 10.2 of Stellar’s Form 8-K (file No. 001-37862), filed with the SEC on February 28, 2018).
|
10.9*
|
|
Form of Lock-up Agreement (Incorporated by reference to Exhibit 10.3 of Stellar’s Form 8-K (file No. 001-37862), filed with the SEC on February 28, 2018).
|
10.10*
|
|
Form of Sponsor Lock-up Agreement (Incorporated by reference to Exhibit 10.4 of Stellar’s Form 8-K (file No. 001-37862), filed with the SEC on February 28, 2018).
|
Exhibit
No.
|
|
Description
|
10.11*
|
|
Form of Token Rights Agreement (Incorporated by reference to Exhibit 10.23 of Stellar’s Form S-4/A (File
No. 333-224227), filed with the SEC on October 2, 2018).
|
10.12*
|
|
Letter Agreement, dated August 18, 2016, by and among Stellar, the initial shareholders and the officers and directors of Stellar (Incorporated by reference to Exhibit 10.3 of Stellar’s Form 8-K (File No. 001-37862), filed with the SEC on August 24, 2016).
|
10.13*
|
|
Investment Management Trust Account Agreement, dated August 18, 2016, between Continental Stock Transfer & Trust Company and Stellar (Incorporated by reference to Exhibit 10.1 of Stellar’s Form 8-K (File No. 001-37862), filed with the SEC on August 24, 2016).
|
10.14*
|
|
Administrative Services Agreement, dated August 18, 2016, between Stellar and Nautilus Energy Management Corp. (Incorporated by reference to Exhibit 10.4 of Stellar’s Form 8-K (File No. 001-37862), filed with the SEC on August 24, 2016).
|
10.15*
|
|
Form of Promissory Note, dated August 24, 2017, issued by Stellar to the Sponsors (Incorporated by reference to Exhibit 10.1 of Stellar’s Form 8-K (File No. 001-37862), filed with the SEC on August 29, 2017).
|
10.16*
|
|
Form of Promissory Note, dated November 24, 2017, issued by Stellar to the Sponsors (Incorporated by reference to Exhibit 10.1 of Stellar’s Form 8-K (file No. 001-37862), filed with the SEC on November 27, 2017).
|
10.17*
|
|
Form of Promissory Note, dated February 23, 2018, issued by Stellar to the Sponsors (Incorporated by reference to Exhibit 10.1 of Stellar’s Form 8-K (file No. 001-37862), filed with the SEC on February 28, 2018).
|
10.18*
|
|
Form of Promissory Note, dated February 22, 2018, issued by Stellar to Phunware (Incorporated by reference to Exhibit 10.2 of Stellar’s Form 8-K (file No. 001-37862), filed with the SEC on February 28, 2018).
|
10.19*+
|
|
Employment Agreement between the Registrant and Alan Knitowski (Incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
|
10.20*+
|
|
Employment Agreement between the Registrant and Matt Aune (Incorporated by reference to Exhibit 10.3 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
|
10.21*+
|
|
Employment Agreement between the Registrant and Randall Crowder (Incorporated by reference to Exhibit 10.4 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
|
10.22*+
|
|
Employment Agreement between the Registrant and Barbary Brunner (Incorporated by reference to Exhibit 10.5 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
|
10.23*+
|
|
Employment Agreement between the Registrant and Luan Dang (Incorporated by reference to Exhibit 10.6 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
|
10.24*+
|
|
Employment Agreement between the Registrant and Matthew Lindenberger (Incorporated by reference to Exhibit 10.7 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
|
10.25*+
|
|
Employment Agreement between the Registrant and Tushar Patel (Incorporated by reference to Exhibit 10.8 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
|
16.1*
|
|
Letter regarding Change in Independent Registered Public Accounting Firm, dated December 26, 2018 (Incorporated by reference to Exhibit 16.1 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
|
16.2*
|
|
Letter from Ernst & Young LLP dated June 8, 2018 (Incorporated by reference to Exhibit 16.1 of the Stellar’s Form S-4/A (File No. 333-2242272), filed with the SEC on June 11, 2018).
|
21.1*
|
|
List of Subsidiaries of the Registrant (Incorporated by reference to Exhibit 21.1 of Stellar’s Form S-4 (File
No. 333-224227), filed with the SEC on April 11, 2018)
.
|
23.1
|
|
Consent of WithumSmith+Brown, PC.
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23.2
|
|
Consent of Marcum LLP.
|
23.3
|
|
Consent of Ernst & Young LLP.
|
23.4**
|
|
Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1).
|
24.1
|
|
Power of Attorney.
|
|
**
|
To be filed by amendment.
|
|
+
|
Indicates
a management or compensatory plan.
|
|
†
|
Schedules
to this exhibit have been omitted pursuant to Item 601(b)(2) of Registration S-K. The Registrant hereby agrees to furnish a copy
of any omitted schedules to the Commission upon request.
|
(b)
Financial
Statement Schedules
. All financial statement schedules are omitted because the information called for is not
required or is shown either in the consolidated financial statements or in the notes thereto.
ITEM
17. UNDERTAKINGS.
|
(a)
|
The
undersigned Registrant hereby undertakes:
|
|
(1)
|
To
file, during any period in which offers or sales are being made, a post-effective amendment
to this Registration Statement:
|
|
(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities Act;
|
|
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective date of the
Registration Statement (or the most recent post-effective amendment thereof) which individually
or in the aggregate, represent a fundamental change in the information set forth in the
Registration Statement.
|
Notwithstanding
the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration
Fee” table in the effective Registration Statement; and
|
(iii)
|
To
include any material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such information in
the Registration Statement;
|
provided,
however, that paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the SEC by the Registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in the Registration Statement,
or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement.
|
(2)
|
That,
for the purpose of determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
|
|
(3)
|
To
remove from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering.
|
|
(4)
|
That,
for the purpose of determining liability under the Securities Act to any purchaser:
|
|
(A)
|
Each
prospectus filed by the Registrant pursuant to Rule 424(b)(3) shall be deemed to be part
of the registration statement as of the date the filed prospectus was deemed part of
and included in the registration statement; and
|
|
(B)
|
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5) or (b)(7) as part
of a registration statement in reliance on Rule 430B relating to an offering made pursuant
to Rule 415(a)(1)(i), (vii) or (x) for the purpose of providing the information required
by Section 10(a) of the Securities Act shall be deemed to be part of and included in
the registration statement as of the earlier of the date such form of prospectus is first
used after effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability purposes
of the issuer and any person that is at that date an underwriter, such date shall be
deemed to be a new effective date of the registration statement relating to the securities
in the registration statement to which the prospectus relates, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering thereof.
Provided, however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such effective
date, supersede or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such document immediately
prior to such effective date.
|
|
(5)
|
That,
for the purpose of determining liability of the registrant under the Securities Act of
1933 to any purchaser in the initial distribution of the securities, t
he
undersigned registrant undertakes that in a primary offering of securities of the undersigned
registrant pursuant to this registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the undersigned registrant
will be a seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
|
|
(i)
|
Any
preliminary prospectus or prospectus of the undersigned registrant relating to the offering
required to be filed pursuant to Rule 424;
|
|
(ii)
|
Any
free writing prospectus relating to the offering prepared by or on behalf of the undersigned
registrant or used or referred to by the undersigned registrant;
|
|
(iii)
|
The
portion of any other free writing prospectus relating to the offering containing material
information about the undersigned registrant or its securities provided by or on behalf
of the undersigned registrant; and
|
|
(iv)
|
Any
other communication that is an offer in the offering made by the undersigned registrant
to the purchaser.
|
|
(b)
|
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may be permitted
to directors, officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the final adjudication
of such issue.
|
|
(c)
|
The
undersigned Registrant hereby undertakes that:
|
|
(1)
|
For
purposes of determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared effective.
|
|
(2)
|
For
the purpose of determining any liability under the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
|
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Austin, State of Texas, on February 5, 2019.
|
PHUNWARE, INC.
|
|
|
|
By:
|
/s/ Alan S.Knitowski
|
|
|
Alan S. Knitowski
|
|
|
Chief Executive Officer
|
POWER
OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Alan S. Knitowski
and Matt Aune, and each of them, as his or her true and lawful attorney-in-fact and agent with full power of substitution, for
him or her in any and all capacities, to sign any and all amendments to this registration statement (including post-effective
amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) under the Securities
Act of 1933 increasing the number of securities for which registration is sought), and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact,
proxy and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact, proxy and agent, or his or her substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated:
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Alan S. Knitowski
|
|
Chief Executive Officer
|
|
February 5, 2019
|
Alan S. Knitowski
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Matt Aune
|
|
Chief Financial Officer
|
|
February 5, 2019
|
Matt Aune
|
|
(Principal Accounting and Financial Officer)
|
|
|
|
|
|
|
|
/s/ Keith Cowan
|
|
Director
|
|
February 5, 2019
|
Keith Cowan
|
|
|
|
|
|
|
|
|
|
/s/ Prokopios Tsirigakis
|
|
Chair of the Board of Director
|
|
February 5, 2019
|
Prokopios Tsirigakis
|
|
|
|
|
|
|
|
|
|
/s/ Randall Crowder
|
|
Chief Operating Officer and Director
|
|
February 5, 2019
|
Randall Crowder
|
|
|
|
|
|
|
|
|
|
/s/ Lori Tauber Marcus
|
|
Director
|
|
February 5, 2019
|
Lori Tauber Marcus
|
|
|
|
|
|
|
|
|
|
/s/ Kathy Tan Mayor
|
|
Director
|
|
February 5, 2019
|
Kathy Tan Mayor
|
|
|
|
|
|
|
|
|
|
/s/ George Syllantavos
|
|
Director
|
|
February 5, 2019
|
George Syllantavos
|
|
|
|
|
Grafico Azioni STELLAR ACQUISITION III INC. (NASDAQ:STLRU)
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