Phunware, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; financial statements are unaudited. Amounts below are in U.S. dollars. The company provides mobile software, services and advertising solutions through its Multiscreen as a Service platform. It completed a reverse merger and recapitalization in December 2018 and changed to a calendar fiscal year.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $5.637 million | $5.215 million | $16.462 million | $24.380 million |
| Gross profit / margin | $3.219 million / 57.1% | $2.508 million / 48.1% | $8.705 million / 52.9% | $15.737 million / 64.5% |
| Operating loss | $2.292 million | $3.341 million | $8.526 million | $5.269 million |
| Net loss | $2.426 million | $3.520 million | $8.987 million | $6.212 million |
| Adjusted EBITDA (non-GAAP) | $(1.521) million | $(3.200) million | $(7.136) million | $(13.482) million |
Q3 revenue rose 8.1%, led by platform subscriptions and services, up 18.5% to $5.152 million; application transaction revenue fell 44.0% to $485,000. For the nine-month comparison, reported revenue declined 32.5%, while gross profit fell 44.7%. Management attributes much of the reported revenue decline to $8.428 million of nonrecurring items recognized in 2018. Excluding those items, nine-month revenue was $16.462 million in 2019 versus adjusted revenue of $15.952 million in 2018. Dollar-based revenue retention was 97% in both periods presented.
At September 30, cash was $68,000, compared with $844,000 at December 31, 2018. Current assets were $3.946 million and current liabilities $19.457 million. Total assets were $30.425 million, including $25.786 million of goodwill; stockholders’ equity was $6.481 million. Nine-month cash used in operating activities was $5.899 million. The filing’s MD&A gives a different 2018 operating cash-use comparison ($6.439 million) than the cash-flow statement ($5.500 million); investors should verify the correct comparative figure.
Factored receivables payable were $1.546 million. The company had $250,000 outstanding under a 7% convertible note, due June 2024, convertible at $11.50 per share. It also had $7.335 million in deferred revenue and $1.202 million in PhunCoin deposits. The Series A preferred financing was fully redeemed during the nine months for $6.240 million, including dividends. Cash and restricted cash declined by $6.276 million during the period.
Material changes, outlook and risks
- Fox customer concentration: Fox Networks Group accounted for 55% of Q3 revenue and 58% for the nine months. The company completed its Fox statement of work on September 30, 2019 and had no active statements of work thereafter, although the master services agreement remained in place. Management warned that further Fox sales may not occur in the foreseeable future.
- Operating costs: Nine-month sales and marketing expense declined 54.2% and research and development expense declined 39.6%, primarily reflecting lower headcount. General and administrative expense increased 8.9%, including higher stock-based compensation and professional fees. The company reported workforce reductions of 23 people in April and 21 people, or 18%, following completion of the Fox work.
- Going concern and funding: Management concluded substantial doubt exists about the company’s ability to continue as a going concern for one year after issuance of the financial statements. It expects operating losses and negative operating cash flows to continue and says additional capital or expense reductions will be necessary; prospective funding is not assured. The board authorized up to $20 million of convertible notes in 2019, but only $250,000 had been issued by September 30. A further $20 million of promissory notes was authorized in October; none had been issued as of November 14, 2019.
- Revenue visibility: Backlog plus deferred revenue was $13.899 million at September 30, down from $24.981 million at December 31, 2018. Remaining performance obligations were $7.956 million; the company expected to recognize 41% over the following 12 months. Management does not expect to be profitable in the near future.
- Uber litigation: Phunware seeks approximately $3 million plus interest for unpaid advertising invoices. Uber’s amended cross-complaint alleges approximately $17 million was fraudulently obtained and seeks treble and other damages, fees and costs. The company disputes Uber’s claims but makes no prediction on outcomes; it says a loss estimate is not possible.
- Digital assets: PhunCoin offerings had raised approximately $1.2 million by September 30; the company anticipated issuance in 2020, but the token ecosystem launch date remained uncertain. Phun had not been sold. The filing describes regulatory, accounting, security, privacy and adoption uncertainties related to the token plans.
- Other items: Goodwill was approximately 85% of total assets. After an interim impairment analysis prompted by Fox-related revenue risk, operating results and a sustained market-cap decline, the company recorded no impairment as of September 30. ASC 606 adoption affected reported nine-month 2019 revenue and net loss by $346,000 and $350,000, respectively, compared with amounts without adoption. The company had no digital currencies on hand at quarter end.
Key facts for investors to verify
- Whether Phunware replaces or renews Fox work, and the resulting customer concentration and revenue trend.
- Cash runway, working-capital needs, and whether announced debt or equity funding is actually obtained on acceptable terms.
- The status, potential financial exposure and developments in the Uber litigation.
- Collections on receivables, including the $3.089 million allowance associated with the Uber matter, and future reliance on factoring.
- Progress, costs, regulatory treatment and obligations related to PhunCoin, Phun and the proposed token ecosystem.
- Goodwill valuation assumptions and potential impairment risk, as well as dilution from warrant exercises, equity awards and convertible securities.
- The discrepancy between the cash-flow statement and MD&A comparative 2018 operating cash-use figures.