Phunware, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results; dollar amounts below are in millions unless stated otherwise. Phunware operates a mobile software platform and, through Lyte, sells high-performance computers.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $3.49 | $5.49 | $8.23 | $12.26 |
| Gross profit / margin | $0.46 / 13.1% | $1.52 / 27.7% | $0.82 / 9.9% | $3.29 / 26.8% |
| Operating loss | $(8.20) | $(7.54) | $(15.45) | $(12.56) |
| Net loss | $(6.52) | $(17.07) | $(10.79) | $(31.99) |
| Adjusted EBITDA (non-GAAP) | $(5.22) | $(6.60) | $(10.82) | $(10.85) |
Q2 revenue was split between platform ($1.30 million) and hardware ($2.19 million). Hardware gross profit was negative $0.08 million in Q2; platform gross margin was 41.4% and hardware gross margin was negative 3.6%. For the first half, platform and hardware gross margins were 23.1% and 3.7%, respectively.
At June 30, cash was $1.11 million, current assets $4.83 million, current liabilities $19.25 million, and stockholders’ equity $17.91 million. The company reported a $14.42 million working-capital deficit. The net carrying value of long-term debt classified as current was $6.09 million; the 2022 Promissory Note had $6.43 million principal outstanding before debt discount. Six-month operating cash use was $12.56 million; investing provided $15.38 million, principally from digital-asset sales, while financing used $3.72 million. Cash declined $0.85 million to $1.11 million.
Changes and notable items
- Revenue declined 36.4% in Q2 and 32.9% in the first half year over year. Management attributed the decreases to lower Lyte computer orders and shipments and the absence of PhunToken sales in 2023; PhunToken sales contributed $1.53 million of first-half 2022 revenue.
- Gross profit fell 70.0% in Q2 and 75.2% in the first half. Management cited lower revenue, a $0.3 million charge for obsolete Lyte inventory components, higher stock-based compensation, and lower transactional revenue/margins.
- Operating expenses were down 4.4% in Q2 but up 2.6% for the first half. Q2 included a $1.20 million non-cash goodwill impairment for Lyte, following a valuation indicating its carrying amount exceeded fair value.
- Other income included gains on digital-asset sales of $2.10 million in Q2 and $5.31 million in the first half. The company received $15.39 million of sale proceeds during the first half and ended June with $0.07 million of digital assets, versus $10.14 million at year-end.
- Backlog plus deferred revenue was $5.24 million at June 30, down from $8.00 million at December 31, 2022. The filing states approximately 43% of backlog was expected to be invoiced within 12 months; approximately 33% of remaining performance obligations was expected to be recognized as revenue in that period.
Liquidity, outlook, risks, and contingencies
- Going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern for one year after issuance. The company has a history of losses, used $12.56 million in operating cash in the first half, and expects operating expenses to exceed revenue for the foreseeable future. Management said existing cash was insufficient for operating needs over the following year and that potential financing and cost reductions were not assured.
- Subsequent financing and cost actions: From July 1 through August 14, the company sold 13.09 million shares through its at-the-market offering for $5.49 million net proceeds. In July it implemented headcount and other expense reductions. These actions followed quarter-end and do not eliminate the disclosed funding uncertainty.
- Debt amendment: On August 14, the company extended the 2022 Promissory Note maturity to June 1, 2024, removed the $1.77 million payment due August 1, and set monthly amortization payments of at least $0.80 million beginning August 31. The balance accrues interest at 8%; payment deferrals are no longer permitted. The noteholder received limited conversion rights at a price based on 90% of the lower of specified trading-price measures, subject to conditions. The company also agreed to an approximately $0.71 million extension fee.
- Nasdaq: The company was below the $1.00 minimum bid-price requirement and had until October 10, 2023 to regain compliance. A delisting could reduce liquidity and access to capital and, under the filing’s risk disclosure, trigger a default under the note.
- Litigation: In a stockholder lawsuit, the court dismissed Texas-law claims but allowed Delaware-law claims to proceed. Mediation occurred in July 2023, with further mediation scheduled for late August. No liability was recorded because a loss was not considered probable or reasonably estimable; the filing says an unfavorable outcome could be material.
- Management outlook: The company said it did not expect to be profitable in the near future and planned continued investment in products and growth. No specific revenue or earnings guidance was provided.
Important facts for investors to verify
- Whether cost reductions, ATM proceeds, and any further financing can fund operations and address the going-concern uncertainty.
- Debt amortization, conversion activity, extension-fee and interest effects, and the risk of further equity dilution.
- Progress toward Nasdaq bid-price compliance and any implications for the note or capital-raising capacity.
- Lyte demand, hardware margins, inventory obsolescence, and whether platform revenue and contract backlog stabilize.
- Developments in the stockholder litigation and whether additional goodwill impairment or other material charges arise.