Phunware, Inc. — FY2019 Form 10-K
Reporting period: Year ended December 31, 2019; comparisons are with FY2018. Phunware provides a mobile software, services, advertising and data platform. The filing was signed March 30, 2020. Financial amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $19.15 | $30.88 | Down 38.0% |
| Gross profit / margin | $10.13 / 52.9% | $19.08 / 61.8% | Profit down 46.9% |
| Operating loss | $(12.31) | $(6.86) | Loss widened |
| Net loss | $(12.87) | $(9.80) | Loss widened |
| Adjusted EBITDA (non-GAAP) | $(10.17) | $(17.00) | Loss narrowed |
| Cash used in operations | $(6.19) | $(6.59) | Use decreased |
Platform subscriptions and services revenue was $17.24 million, down 11.2%; application transaction revenue was $1.91 million, down 83.4%. Platform subscriptions and services represented 90% of 2019 revenue. GAAP gross margin fell to 52.9% from 61.8%. Management’s adjusted gross margin was 53.8% versus 47.9%; this non-GAAP measure excludes specified items and should be considered alongside GAAP results.
At year-end, cash was $0.276 million and restricted cash was $0.086 million. Current assets of $2.315 million were substantially below current liabilities of $19.833 million, a working-capital deficit of about $17.5 million. Total assets were $29.05 million, including $25.86 million of goodwill (about 90% of assets); no goodwill impairment was recorded. The balance sheet reported $1.105 million of debt and $1.077 million of factored receivables payable. Operating lease obligations totaled $3.79 million.
The independent auditor issued an unqualified opinion on the financial statements but included a going-concern explanatory paragraph. Management also concluded substantial doubt existed about the company’s ability to continue as a going concern, citing recurring losses, negative operating cash flows, a significant working-capital deficiency and dependence on additional funding.
Material changes and notable items
- Fox Networks Group accounted for 50% of 2019 revenue ($9.5 million), versus 42% in 2018 ($12.8 million). The Fox statement of work ended September 30, 2019; no active statements of work remained, creating a significant risk to future revenue.
- Application transaction revenue fell partly because 2018 included $6.3 million recognized after a partner released the company from a revenue-share liability. FY2018 also included $8.4 million in total one-time revenue adjustments; comparisons of adjusted results should take this into account.
- Backlog plus deferred revenue declined to $12.62 million from $24.98 million. Dollar-based revenue retention fell to 76% from 94%, primarily due to the Fox engagement ending.
- Operating expenses declined 13.5% to $22.44 million, including lower sales and marketing and research and development costs, partly offset by higher general and administrative expenses. G&A rose 13.6%, including increased stock compensation and Uber-related legal fees.
- The company adopted ASC 606 in 2019 using the modified retrospective method. It reported that adoption added $0.401 million to 2019 revenue compared with prior guidance; adoption also changed the timing of recognition for certain development, subscription and commission costs.
- Warrant exercises generated $6.1 million of cash proceeds, while $6.2 million was paid to redeem Series A preferred stock. Total financing cash flow was only $0.10 million, compared with $12.32 million in 2018.
Outlook, risks and contingencies
- Management said it did not expect to be profitable in the near future and anticipated continued investment and operating expenditures potentially exceeding revenue. It gave no quantified revenue or earnings guidance.
- Management was pursuing financing, credit lines, equity issuance and cost reductions, but stated that funding was not assured. The filing reports $1.1 million raised under 2019 debt offerings by year-end and $1.2 million from PhunCoin rights; no Phun tokens had been sold. The company did not anticipate further PhunCoin-rights proceeds.
- After year-end, Phunware issued a $3.0 million senior convertible note for a $2.76 million purchase price, with estimated net proceeds of about $2.37 million. Its conversion and installment terms can result in substantial share issuance and dilution, and specified events can require cash repayment. Related parties also provided $0.56 million in bridge loans through the financial-statement issuance date.
- COVID-19 disruption was identified as a material uncertainty. In March 2020, the company furloughed 37 employees, approximately 42% of its workforce, and said it was reducing operating expenses. The duration and financial impact were not estimable.
- Uber sued over advertising campaigns, alleging approximately $17 million in claimed losses and seeking treble and other damages; Phunware also seeks about $3 million for unpaid invoices. The company disputed Uber’s claims and made no prediction about the outcome. A court ordered $78,000 in sanctions in March 2020. Other matters include a stockholder suit seeking unspecified damages exceeding $1 million and a law-firm claim for $690,000, which was already reflected in payables and accrued expenses.
- The company planned to launch its token ecosystem in 2020, but stated there was no assurance it would launch or that the tokens would gain commercial adoption. Other key risks include customer concentration, privacy and cybersecurity regulation, competition, litigation, financing needs and potential goodwill impairment.
Important facts for investors to verify
- Whether Phunware secured sufficient funding to address its working-capital deficit and meet obligations, and the resulting borrowing costs and dilution.
- Post-Fox revenue, backlog, renewals and customer retention, including whether new or expanded customer work replaced the ended Fox statement of work.
- Cash burn, cash availability and debt repayment or conversion terms, including the senior convertible note’s potential share dilution and cash-payment triggers.
- Developments and potential financial exposure in the Uber, Wild Basin and EGS legal proceedings.
- COVID-19’s actual effect on customer spending, operations and the company’s reduced workforce, as well as progress and costs for any token ecosystem launch.