Business context and reporting period
Phunware, Inc.’s Form 10-K covers the fiscal year ended November 30, 2018; it does not provide standalone fourth-quarter results. The financial statements presented are principally those of Stellar Acquisition III, the SPAC that legally acquired Phunware on December 26, 2018. The transaction is accounted for as a reverse merger and recapitalization, with Phunware as the accounting predecessor. Accordingly, Stellar’s reported results below are not Phunware’s operating results.
Phunware’s business is a mobile application platform offering software, media and data services. Its planned PhunCoin ecosystem was still under development and was not generating revenue.
Financial results, liquidity and capital
| Metric | Year ended Nov. 30, 2018 | Year ended Nov. 30, 2017 |
|---|---|---|
| Revenue | No operating revenue reported by Stellar | No operating revenue reported by Stellar |
| Operating costs | $1.68 million | $0.86 million |
| Trust-account investment income | $0.76 million | $0.55 million |
| Net loss | $0.92 million | $0.31 million |
| Net cash used in operating activities | $1.04 million | $0.76 million |
At November 30, 2018, total assets were $19.72 million, including $19.71 million held in the trust account; reported bank cash was $93. Current liabilities were $2.60 million and total liabilities were $3.06 million. The trust-account funds were subject to transaction and redemption restrictions. The filing’s MD&A separately states that approximately $19,223 was available outside the trust account, which does not match the balance-sheet cash figure.
During 2018, operating costs rose mainly because of legal and professional fees related to the proposed merger. Trust assets declined from $71.22 million at November 30, 2017 to $19.71 million at November 30, 2018, principally amid shareholder redemptions. At the December 26 closing, further redemptions of approximately $19.3 million left about $0.4 million in the trust account immediately before closing. A $6.0 million Series A preferred financing was issued in connection with the transaction; the preferred shares carry an 8% rate and specified cash-redemption terms at 104% of original value.
Material changes, outlook and risks
- The business combination closed after the reporting date; PHUN and PHUNW began Nasdaq trading on December 28, 2018. The company changed its fiscal year-end to December 31.
- The filing says Phunware had declining revenue, recurring losses and negative operating cash flows, but this text does not provide clear numerical Phunware revenue, profit, cash-flow or margin figures for the year ended November 30, 2018.
- The auditor and management disclosed substantial doubt about Phunware’s ability to continue as a going concern, citing losses, working-capital deficiency and the need for additional funding. Management said it did not expect near-term profitability and discussed financing, partnerships and cost reductions; none was assured.
- PhunCoin’s Rule 506(c) rights offering had raised $990,000 as of the report date, against an offering of up to $100 million. Launch timing, legal and regulatory eligibility, accounting treatment, adoption and funding outcomes remain uncertain.
- Key risks include customer concentration (Fox Networks Group and Fetch accounted for 44% and 11% of 2017 net sales, respectively), privacy and data-protection regulation, competition, cybersecurity, and the uncertain economics and regulation of digital assets.
- Phunware disclosed litigation with Uber over unpaid advertising invoices of approximately $3 million, alongside Uber’s cross-claims alleging fraud and contract issues; the company had recorded bad-debt expense for the unpaid invoices. The filing does not estimate potential losses on Uber’s claims.
Investor verification priorities
- Review Phunware’s post-merger financial statements and cash position separately from the SPAC financial statements in this filing.
- Reconcile cash available outside the trust account: the balance sheet reports $93, while MD&A cites approximately $19,223.
- Confirm post-closing liquidity, obligations and the status of the Series A preferred shares’ redemption and conversion terms.
- Track operating losses, working capital, cash burn and whether financing or other measures adequately address the going-concern warning.
- Monitor the Uber litigation, customer concentration and the progress, proceeds and regulatory status of the PhunCoin offering and ecosystem.