Phunware, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 13, 2019. Amounts are in thousands of dollars unless stated otherwise. Phunware provides mobile software, application development and advertising services through its Multiscreen as a Service platform. The 2018 comparison is affected by one-time revenue items and is not directly comparable.
Financial performance
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $5,510 | $14,185 | $10,825 | $19,165 |
| Gross profit | $2,788 | $11,116 | $5,486 | $13,229 |
| GAAP gross margin | 50.6% | 78.4% | 50.7% | 69.0% |
| Operating income (loss) | $(2,924) | $4,666 | $(6,234) | $(1,928) |
| Net income (loss) | $(3,067) | $4,472 | $(6,561) | $(2,692) |
| Adjusted EBITDA, non-GAAP | $(2,411) | $(3,593) | $(5,615) | $(10,282) |
Q2 basic and diluted loss per share was $0.08; H1 loss per share was $0.19. Adjusted gross margin, a non-GAAP measure, was 51.2% for both Q2 and H1 2019, versus 47.2% and 45.1%, respectively, in 2018.
- Q2 revenue declined 61.2% year over year; H1 revenue declined 43.5%. Application transaction revenue fell 94.6% in Q2 and 89.5% in H1. Platform subscriptions and services fell 21.0% in Q2 and 5.2% in H1.
- The company attributed much of the reported comparison to $8.428 million of one-time revenue recognized in 2018, including a $6.3 million partner liability release and partner/customer arrangements. Excluding those items, non-GAAP adjusted revenue was $5.510 million versus $5.757 million in Q2, and $10.825 million versus $10.737 million in H1.
- Q2 operating expenses decreased 11.4% to $5.712 million. Lower sales and marketing and R&D costs, mainly associated with reduced headcount, were partly offset by higher G&A, including stock compensation and public-company costs.
Cash, liquidity and capital
At June 30, 2019, cash was $248, total current assets were $4.534 million and current liabilities were $17.497 million. The resulting current ratio was approximately 0.26. Total liabilities were $22.873 million and stockholders’ equity was $8.143 million. Cash and restricted cash declined by $6.096 million during H1, from $6.344 million to $248.
- Operating cash use was $5.866 million in H1; investing activities provided $88, and financing activities used $314. Operating cash use was broadly similar to H1 2018 ($6.019 million).
- At period end, factored receivables payable were $1.775 million; the factoring facility had $1.225 million available for future advances. The company reported a $250,000 convertible note payable. The authorized note program is up to $20 million, bears 7% annual interest and matures in 2024; only $250,000 had been issued by June 30.
- Warrant exercises generated approximately $6.1 million of cash proceeds in H1. The company also redeemed Series A preferred stock for $6.24 million, including dividends. Common shares outstanding increased to approximately 38.9 million by June 30; 38,966,575 were reported outstanding as of August 8.
Outlook, risks and unusual items
Management gave no quantified revenue or earnings guidance. It said it expects losses and negative operating cash flows to continue into the foreseeable future and does not expect near-term profitability. The filing concludes there is substantial doubt about the company’s ability to continue as a going concern through one year after issuance. Management is considering additional debt or equity financing, credit facilities and expense reductions, but states these measures are not assured and may not be sufficient.
- Customer concentration: Fox Networks Group accounted for 57% of Q2 and 59% of H1 revenue; Houston Methodist accounted for 8% and 11%, respectively. Fox represented 46% of accounts receivable at June 30.
- Uber litigation: Phunware seeks approximately $3 million plus interest for unpaid advertising invoices; the related receivable carries a $3.089 million allowance. Uber’s amended cross-complaint alleges approximately $17 million in fraudulently obtained funds and seeks treble and other damages, fees and costs. Phunware disputes the allegations and makes no prediction on outcome. Trial was set for April 20, 2020.
- Tokens: PhunCoin rights offerings had raised $1.2 million by June 30; the company had not sold any Phun tokens. The Token Ecosystem launch timing was uncertain, and PhunCoin may have no utility until the ecosystem is operational. The filing highlights regulatory, accounting, cybersecurity and adoption risks.
- Revenue accounting: The company adopted ASC 606 on January 1, 2019. Adoption increased Q2 reported revenue by $109, and H1 revenue by $291, relative to amounts without adoption; contract-specific timing can affect reported revenue.
- Other commitments: A July 2019 Irvine office lease, commencing November 2019, carries disclosed future minimum payments of $1.896 million through its initial term. The company also reported no off-balance-sheet arrangements.
Key facts for investors to verify
- Cash runway, near-term obligations and whether additional financing is secured on workable terms.
- Revenue trends excluding the 2018 one-time items, customer renewals and continued dependence on Fox Networks Group.
- Progress and costs of the PhunCoin/Phun ecosystem, regulatory status and any future proceeds.
- Developments and potential exposure in the Uber litigation, including the recoverability of the recorded receivable.
- Potential share dilution from outstanding warrants, equity awards and future financing; compare reported share counts and warrant exercises.
- Effect of ASC 606 and the new Irvine lease on future reported results and cash requirements.