Phunware, Inc. — SEC filing summary
Important scope note: This Form 10-Q is filed by Stellar Acquisition III Inc., a blank-check company pursuing a merger with Phunware. It does not report Phunware’s operating results; the financial figures below are Stellar’s.
Business context and reporting period
The unaudited quarter and nine-month periods ended August 31, 2018, compared with the corresponding 2017 periods; balance-sheet comparisons are with November 30, 2017. Stellar had not commenced operations and was seeking to complete its proposed merger with Phunware. The merger agreement valued Phunware at an enterprise value of $301 million, subject to customary cash and debt adjustments. Stellar anticipated a shareholder vote and closing before year-end 2018.
Financial results and liquidity
| Metric | Three months ended Aug. 31, 2018 | Three months ended Aug. 31, 2017 | Nine months ended Aug. 31, 2018 | Nine months ended Aug. 31, 2017 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Formation and operating costs | $552,385 | $234,351 | $1,421,213 | $629,569 |
| Trust investment income | $163,299 | $168,320 | $659,361 | $368,766 |
| Net loss | $389,086 | $66,031 | $761,852 | $260,803 |
| Basic and diluted loss per share | $0.14 | $0.02 | $0.27 | $0.10 |
For the nine months, operating cash use was $149,580. Cash at August 31 was $19,223 outside the Trust Account; the Trust Account held approximately $19.49 million, principally in U.S. Treasury bills. Trust assets were not generally available for operating expenses. Total assets were $19.55 million, total liabilities $2.73 million, and shareholders’ equity $5.00 million. Current liabilities were $2.27 million, including $994,681 of related-party notes and $424,549 owed to Phunware. There was no reported long-term debt. Profit margins are not meaningful because Stellar had no revenue.
Material changes versus comparable periods
- Quarterly operating costs rose to $552,385 from $234,351, and quarterly net loss increased to $389,086 from $66,031.
- Nine-month operating costs and net loss increased substantially year over year; trust investment income also increased, but did not offset the higher costs.
- Public shareholders redeemed 3,353,060 shares in May and 1,695,830 in August, removing a combined $52.56 million from the Trust Account. The Trust Account declined from $71.22 million at November 30, 2017 to approximately $19.49 million at August 31, 2018.
- Deferred underwriting fees fell to $462,930 from $1.73 million, reflecting the redemptions.
Outlook, risks and unusual items
- Shareholders extended Stellar’s business-combination deadline to December 26, 2018. If no transaction is completed by then, Stellar must cease operations, redeem public shares and liquidate. Management said this mandatory liquidation raises substantial doubt about the company’s ability to continue as a going concern.
- The merger agreement called for good-faith efforts to make at least $40 million in cash available to the post-transaction company, including Trust Account funds and any backstop financing. After substantial redemptions, the Trust Account balance was below the merger agreement’s Minimum Cash Asset Level; the filing does not provide a clear amount of any backstop financing secured.
- Additional sponsor and Phunware extension notes supported extensions. These notes bear no interest and are repayable upon a business combination; sponsor balances may be converted into warrants. The company also reported $70,000 of outstanding invoices to an affiliate.
- Further shareholder redemptions, transaction expenses, financing needs, and the minimum net tangible asset requirement of $5,000,001 could affect whether the merger proceeds and how much cash remains for the combined company. Issuing stock or debt could dilute shareholders or increase financial risk.
- Stellar reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of quarter-end.
Most important facts for investors to verify
- Whether the merger closed, its final terms, and the post-redemption cash available after transaction expenses and liabilities.
- Whether additional redemptions or financing affected the $40 million cash objective and the minimum net tangible asset condition.
- The terms and repayment or conversion status of sponsor and Phunware extension notes and related-party payables.
- Phunware’s standalone operating performance and liquidity, which are not presented in this Stellar 10-Q.
- The consequences if the transaction did not close by the December 26, 2018 deadline, including liquidation and potential loss of warrant value.