Phunware, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Amounts below are in U.S. dollars; financial statement amounts are presented in millions unless noted. Phunware provides mobile software, services and advertising solutions. Following its December 2018 reverse merger and recapitalization, it changed its fiscal year-end to December 31.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $5.315 million | $4.980 million; up 6.7% |
| Gross profit / gross margin | $2.698 million / 50.8% | $2.113 million / 42.4% |
| Operating expenses | $6.008 million | $8.707 million |
| Operating loss | $(3.310) million | $(6.594) million |
| Net loss / loss per share | $(3.494) million / $(0.12) | $(7.164) million / $(0.29) |
| Adjusted EBITDA (non-GAAP) | $(3.204) million | $(6.689) million |
| Cash used in operating activities | $(4.116) million | $(3.296) million |
Platform subscriptions and services revenue rose 20.4% to $4.821 million, while application transaction revenue fell 49.4% to $0.494 million. Revenue from Fox Networks Group was 63% of total; Houston Methodist contributed 13%. The company reported no digital currencies held at March 31, 2019.
At March 31, cash was $1.065 million, current assets were $4.839 million and current liabilities were $16.103 million, implying negative working capital of approximately $11.264 million. Total liabilities were $20.627 million. Factored receivables payable were $1.631 million; no related-party short-term notes were outstanding. Total assets were $31.434 million and stockholders’ equity was $10.807 million. The quarter-end cash balance was down from $6.344 million in cash and restricted cash at December 31, 2018, largely reflecting the preferred-stock redemption and operating cash use.
Material changes and unusual items
- Gross profit increased 27.7%, with management citing lower costs for platform development and support. Operating expenses fell 31.0%, primarily due to lower headcount and related compensation costs.
- The company adopted ASC 606 on January 1, 2019 using the modified retrospective method. Adoption increased opening accumulated equity by $1.087 million; management reported a $0.182 million reduction in Q1 revenue and a $0.046 million increase in sales and marketing expense from the standard. Prior-year results were not restated, limiting direct comparability.
- Series A preferred stock was redeemed in Q1 for $6.240 million, including $0.240 million of dividends. Cash financing also included $5.731 million of warrant-exercise proceeds. The sponsor promissory note of approximately $1.993 million was forgiven in January and recorded in equity.
- Backlog plus deferred revenue was $20.294 million at March 31, down from $24.981 million at year-end. Dollar-based revenue retention was 98%, compared with 134% in the prior-year period.
Outlook, risks and contingencies
- Management expects operating losses and negative operating cash flows to continue into the foreseeable future and does not expect near-term profitability. The filing concludes that substantial doubt exists about the company’s ability to continue as a going concern for one year after issuance of the financial statements. Additional financing or expense reductions may be needed; financing is not assured.
- Phunware’s customer concentration is material, particularly its reliance on Fox. The filing also notes that results may fluctuate with advertising campaign activity and customer spending.
- The company’s litigation with Uber includes Phunware’s claim for approximately $3 million plus interest for unpaid invoices, and Uber’s cross-claims alleging fraud- and contract-related issues. Uber did not specify damages against Phunware; trial was scheduled for August 12, 2019. The company said outcomes and potential losses could not be predicted or estimated.
- PhunCoin issuance and ecosystem launch remain uncertain. The filing reported $1.020 million raised in the Regulation D rights offering and anticipated a beta review period likely concluding in Q3 2019, with no firm launch date. Rights proceeds are recorded as deferred revenue; the company warned that a failure to launch or raise substantial proceeds could adversely affect liquidity.
- Warrant exercises may provide capital but are uncertain and may create dilution. The company had not obtained an effective registration statement for public-warrant shares within the specified period, allowing cashless exercises where an exemption was available. Share-price volatility and warrant-related dilution were identified as risks.
- The company reported effective disclosure controls as of quarter-end. It had no off-balance-sheet arrangements; the filing identifies operating lease commitments totaling $0.868 million.
Key facts for investors to verify
- Whether cash runway, operating cash burn and any subsequent financing adequately address the disclosed going-concern uncertainty.
- Whether revenue retention, backlog and deferred revenue stabilize or continue to decline, and whether customer concentration changes.
- The outcome and financial exposure, if any, from the Uber litigation.
- PhunCoin offering obligations, launch timing, proceeds and related cash requirements.
- Warrant exercises, registration status, resulting cash proceeds and potential share dilution.