Phunware, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; financial amounts below are in U.S. dollars and millions unless otherwise noted. Phunware provides a mobile software platform and, following its October 2021 acquisition of Lyte Technology, sells high-performance computers.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $4.76 | $2.16 | $17.02 | $5.24 |
| Gross profit / margin | $0.80 / 16.7% | $1.13 / 52.5% | $4.09 / 24.0% | $2.40 / 45.8% |
| Operating expenses | $8.67 | $5.17 | $24.52 | $14.04 |
| Operating loss | $(7.88) | $(4.04) | $(20.44) | $(11.64) |
| Net income (loss) | $(8.02) | $0.37 | $(40.01) | $(21.71) |
| Adjusted EBITDA (non-GAAP) | $(6.74) | $(2.47) | $(17.59) | $(7.62) |
- Revenue mix: Q3 platform revenue was $1.26 million, down 41.7%; hardware revenue was $3.50 million, primarily from Lyte. For nine months, platform revenue was $5.38 million, up 2.6%, and Lyte hardware revenue was $11.64 million.
- Cash flow: Nine-month operating cash use was $22.87 million, investing cash use $2.29 million, and financing cash inflow $10.77 million. Cash fell $14.60 million from year-end 2021 to $8.54 million at September 30, 2022.
- Balance sheet: Current assets were $26.91 million versus current liabilities of $29.94 million. Total assets were $68.48 million; total liabilities $35.70 million; equity $32.78 million.
- Debt: The July 2022 unsecured promissory note had $12.81 million principal at quarter-end, with $11.80 million net proceeds received. The 2021 note had $0.52 million principal remaining at September 30 and was paid off in October. The 2022 note requires monthly amortization payments of about $1.57 million beginning November 2022 and matures July 1, 2023, subject to permitted deferrals. Deferrals increase the balance by 1.85%; prepayments carry a 110% premium.
- Digital assets: Carrying value was $12.62 million at quarter-end, down from $32.58 million at year-end 2021. The company recorded $21.51 million of impairment expense in the first nine months. Holdings were primarily bitcoin and ether; management cautions that these assets are volatile and less liquid than cash.
- Other metrics: Deferred revenue was $2.81 million and backlog $5.04 million. Approximately 39% of $5.60 million in remaining performance obligations was expected to be recognized over the following 12 months. The filing reports basic and diluted nine-month loss per share of $0.41.
Changes versus comparable periods
- Q3 revenue increased 120.3%, but the increase reflects Lyte hardware sales; platform revenue declined, and total gross profit fell 29.9%. Hardware gross margin was 6.0%, versus platform margin of 46.5%.
- Nine-month revenue rose 224.7%, largely due to Lyte, while gross margin declined to 24.0% from 45.8%, reflecting the lower-margin hardware mix.
- Operating expenses rose 67.7% for the nine months, including higher sales and marketing, general and administrative, and research and development costs. The nine-month net loss widened, principally including the digital-asset impairment.
- Cash and digital-asset carrying value declined materially from December 31, 2021. Total liabilities increased to $35.70 million from $34.02 million, while equity declined to $32.78 million from $65.28 million.
Outlook, risks, contingencies and unusual items
- Management said it does not expect near-term profitability and expects operating losses and negative operating cash flows to continue. It stated that available financing and plans, including potential ATM share sales, were expected to provide sufficient cash for at least one year after filing; it also acknowledged that additional funding may not be available on acceptable terms.
- The filing identifies going-concern considerations, citing the company’s loss history, $40.01 million nine-month net loss, and $22.87 million operating cash use. Management’s mitigation plans include potential equity issuance and the ability to defer note payments; there is no assurance financing will be obtained or adequate.
- In October 2022, CEO and co-founder Alan Knitowski gave notice of resignation effective December 26, 2022. The board formed a transition committee and began a search for new leadership.
- A Delaware stockholder lawsuit challenges a 180-day lock-up and seeks damages and fees. The company intends to defend the matter; it recorded no expense because loss was not considered probable or reasonably estimable, and it could not estimate a loss range.
- Macroeconomic uncertainty, inflation, supply-chain disruption, higher component costs, digital-asset volatility and evolving token regulation are cited risks. The company also disclosed that $2.3 million of backlog was cancellable, though it expected the customer to proceed.
- After quarter-end, the company paid the $1.25 million Lyte earn-out, paid the final $0.57 million installment on the 2021 note, and sold an additional 430,000 shares for $0.64 million net through its ATM program through November 10, 2022.
- The filing says disclosure controls were effective as of September 30, 2022, with no material change in internal control over financial reporting identified during the quarter.
Important facts for investors to verify
- Whether operating cash use can be reduced and whether financing or ATM sales can cover the company’s cash needs and scheduled note payments.
- Lyte’s sales, margins, component availability and working-capital requirements, given its large share of reported revenue but low hardware gross margin.
- The effect of digital-asset price movements, potential further impairment, and the practical liquidity and custody risks of the holdings.
- Progress on CEO succession, the outcome and potential financial exposure of the stockholder litigation, and the cancellable backlog.
- The 2022 note’s stated July 1, 2023 maturity in Note 6 versus an apparent “July 1, 2022” date in the MD&A liquidity discussion; confirm the governing note terms.
- Share dilution: 101.3 million shares were outstanding at September 30, 2022, and 102.6 million at November 7, 2022; the ATM authorization permits further sales.