Phunware, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Phunware operates a mobile software platform and, through Lyte, sells high-performance computers. Financial amounts below are in thousands of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $4,747 | $6,778 |
| Gross profit / gross margin | $361 / 7.6% | $1,771 / 26.1% |
| Operating expenses | $7,612 | $6,793 |
| Operating loss | $(7,251) | $(5,022) |
| Net loss | $(4,269) | $(14,917) |
| Adjusted EBITDA (non-GAAP) | $(5,599) | $(4,246) |
| Cash used in operating activities | $(7,382) | $(10,171) |
| Cash at period end | $694 | $10,815 |
Revenue fell 30.0% year over year: platform revenue decreased 46.0% to $1,345 and hardware revenue decreased 20.6% to $3,402. Platform gross margin fell to 5.5% from 57.2%; hardware gross margin was 8.4% versus 8.1%. Operating expenses rose 12.1%, including higher general and administrative and research and development costs.
Net loss improved year over year largely in comparison with the prior-year digital-asset impairment. Q1 2023 other income included a $3,214 gain on digital-asset sales, partly offset by $537 interest expense. The company sold digital assets for $10,790 in cash proceeds; the gain is not recurring operating revenue. Q1 2022 included $9,353 of digital-asset impairment.
Cash from operations remained materially negative. Investing activities provided $10,784, principally from digital-asset sales, while financing activities used $4,687, including $4,270 of debt payments and $475 of share repurchases. Cash declined by $1,261 during the quarter. At March 31, current assets were $7,902 and current liabilities were $19,636, a working-capital deficit of $11,734. Total liabilities were $23,556; stockholders’ equity was $21,901.
Material changes and balance-sheet items
- Digital assets on the balance sheet declined to $2,530 from $10,137 at December 31, 2022, largely reflecting bitcoin sales. The filing reports 122 bitcoins and 377 ethereum held at quarter end; holdings are exposed to price volatility, custody and liquidity risks.
- Deferred revenue declined to $2,584 from $4,178. Backlog was $3,112, compared with $3,824 at year end; together, backlog and deferred revenue totaled $5,696 versus $8,002.
- In March, Phunware deferred the April–July installments on its 2022 promissory note. The balance was $6,432 principal before $745 of debt discount at March 31. The deferral increases the balance by 1.85% monthly for four months, includes a 5% waiver fee, and results in $1,769 monthly payments beginning August 1, with a revised maturity date of November 1, 2023. The filing states an effective interest rate of approximately 34.98% after modification.
- The company repurchased 461,500 shares for $475 during Q1. Its board had authorized repurchases of up to $5,000, funded through bitcoin liquidation.
- Phunware’s two reported segments were Phunware (revenue $1,345; pretax loss $3,712) and Lyte (revenue $3,402; pretax loss $557).
Outlook, risks and unusual items
Management states that it does not expect to be profitable in the near future and expects operating expenditures to exceed revenue for the foreseeable future. The company has a history of losses and negative operating cash flows. Management concluded that substantial doubt exists about Phunware’s ability to continue as a going concern for one year after the financial statements’ issuance. Possible measures include expense reductions, digital-asset sales and additional equity or other securities offerings, but management said these plans were not assured and did not sufficiently alleviate the doubt.
Subsequent to quarter end, Nasdaq notified Phunware that its share price had been below $1.00 for 30 consecutive business days, giving it until October 10, 2023 to regain compliance. Failure to meet listing requirements could lead to delisting and, under the filing, trigger a default on the 2022 note, making the outstanding balance immediately due at the contractual Mandatory Default Amount. Through May 12, 2023, the company sold 221,632 shares under its at-the-market agreement for net proceeds of $129.
A Delaware stockholder lawsuit concerning a 180-day lock-up was awaiting a court ruling after an April 4, 2023 hearing. The company recorded no expense because a loss was not considered probable or reasonably estimable; it could not estimate a possible loss range. Digital-asset regulation, custody and market risks, customer concentration, financing availability, and potential equity dilution are also relevant. Disclosure controls were reported effective at quarter end.
Investor verification priorities
- Assess near-term funding needs and the going-concern conclusion against cash burn, the working-capital deficit, and available financing.
- Verify the note’s deferral fees, escalating balance, payment schedule, maturity and consequences of a Nasdaq delisting or other default.
- Track Nasdaq bid-price compliance, any reverse-stock-split action, and subsequent ATM issuance and dilution.
- Evaluate whether platform and hardware revenue, gross margins, backlog and deferred revenue can recover; distinguish operating performance from digital-asset sale gains.
- Monitor digital-asset values, liquidity and custody, as well as the status and potential exposure of the stockholder litigation.