Phunware, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unless otherwise indicated, amounts are in millions of dollars; financial statements are unaudited. Phunware provides a mobile software platform and application transaction services.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $2.160 | $3.130 | $5.242 | $7.983 |
| Gross profit / margin | $1.134 / 52.5% | $2.232 / 71.3% | $2.400 / 45.8% | $5.226 / 65.5% |
| Operating expenses | $5.171 | $9.731 | $14.043 | $19.557 |
| Operating loss | $(4.037) | $(7.499) | $(11.643) | $(14.331) |
| Net income (loss) | $0.372 | $(8.567) | $(21.711) | $(16.041) |
| Adjusted EBITDA, non-GAAP | $(2.474) | $(1.258) | $(7.620) | $(6.253) |
| Operating cash flow | Not separately provided for the quarter | $(19.089) | $(6.515) |
Q3 net income included $2.850 million of PPP loan forgiveness income and a $1.501 million gain from revaluing warrant liabilities; these non-operating items offset the operating loss. Nine-month results included a $7.952 million debt-extinguishment loss and $0.776 million digital-currency impairment, partly offset by the PPP forgiveness gain.
Liquidity, debt and capital
- At September 30, cash was $0.882 million and restricted cash was $0.091 million. Current assets were $3.639 million versus current liabilities of $14.850 million.
- Total debt was $1.127 million at quarter-end, including $0.849 million long-term debt and $0.195 million related-party debt. The company also had $1.762 million of warrant liability.
- Cash and restricted cash declined by $3.058 million during the first nine months. Financing cash flow of $17.547 million, including $32.610 million in net stock-sale proceeds, was outweighed in part by $25.116 million of debt payments and operating and investing cash outflows.
- After quarter-end, Phunware reported $62.061 million of net proceeds from additional at-the-market share sales through November 12 and $4.635 million from a partial warrant exercise. These financings materially increased liquidity but also increased shares outstanding; 96,261,780 shares were outstanding November 9, versus 75,556,118 at September 30.
- On October 18, the company received $4.740 million net from an unsecured note with $5.220 million original principal. Monthly amortization payments of $0.574 million begin January 15, 2022; early prepayment and scheduled payments carry a 110% prepayment premium.
- Phunware said the subsequent financing provided sufficient cash to fund anticipated net cash outflows for at least one year after filing. Management also expects continued operating cash outflows and does not expect near-term profitability.
Changes versus prior periods and business developments
- Revenue fell 31.0% in Q3 and 34.3% for the nine-month period. Platform subscriptions and services declined 38.1% and 38.5%, respectively, primarily because a large 2020 customer project did not recur. Application transaction revenue increased 44.1% in Q3 and 8.6% year to date.
- Gross margin contracted substantially, especially in platform services, reflecting the prior-year customer mix and higher stock-based compensation in cost of revenue. Q3 operating expenses fell 46.9%, largely because the 2020 comparison included a $4.5 million legal settlement; sales and marketing and R&D spending rose.
- At September 30, backlog was $3.012 million and deferred revenue was $3.077 million, down from combined $9.066 million at December 31, 2020. Remaining performance obligations were $6.097 million; about 38% was expected to be recognized within 12 months.
- Phunware closed its Lyte Technology acquisition on October 18 for consideration of up to $10.980 million, including a $2.5 million contingent earnout. Final purchase-price allocation was pending; management expected most consideration to be allocated to intangible assets and goodwill. The company expected Lyte revenue to begin in Q4 2021.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects to continue investing in product development, sales and marketing, and business growth, and does not expect to be profitable in the near future.
- Management identified a material weakness in internal control over financial reporting after failing to account for an increase in shares issuable under a warrant. Q1 and Q2 2021 statements were revised; the error did not affect revenue, operating income, cash or operating cash flow. Disclosure controls were deemed ineffective at quarter-end. Remediation was underway but not yet considered complete.
- Customer and receivable concentration are notable: Customer A provided 35% of Q3 revenue and represented 47% of net receivables at September 30.
- Phunware completed its final $4.5 million payment under the Uber settlement during September; Uber’s complaint was dismissed with prejudice October 13. A stockholder lawsuit concerning an IPO lockup remained pending, with potential loss not estimable. Phunware also brought two claims against former counsel; outcomes were uncertain.
- The company held $0.789 million of digital currencies after purchasing $1.497 million and receiving $0.087 million in customer payments during the nine months. It recognized a $0.776 million impairment; under its accounting policy, subsequent price recoveries are not recorded until sale.
- Phunware anticipated issuing PhunCoin in Q4 2021 but cautioned that it could not assure when or whether the token ecosystem would launch. PhunToken sales through September were $0.100 million.
Important facts for investors to verify
- Whether post-quarter equity proceeds and the Lyte acquisition support liquidity while limiting further dilution and debt burden.
- Whether platform revenue stabilizes, customer concentration falls, and gross margins recover after the decline in 2021.
- Progress and testing of controls to remediate the disclosed material weakness, and whether subsequent filings report further revisions.
- Lyte’s post-acquisition revenue, margins, integration costs, and achievement of the earnout milestones.
- Developments in the pending litigation and the timing and feasibility of the PhunCoin ecosystem launch.