Business context and reporting period
This is Stellar Acquisition III Inc.’s unaudited Form 10-Q for the three months ended February 28, 2018—not an operating-company 10-Q filed by Phunware, Inc. Stellar was a blank-check company seeking a business combination and had not commenced operations. On February 27, 2018, it agreed to merge with Phunware; the proposed transaction, not Phunware’s standalone operating performance, is the central business development in this filing.
Financial results and condition
| Metric | Three months ended February 28, 2018 | Prior-year comparable period |
|---|---|---|
| Revenue | $0 | $0 |
| Formation and operating costs | $585,473 | $84,763 |
| Trust account investment income | $221,638 | $73,235 |
| Net loss | $363,835 | $11,528 |
| Basic and diluted loss per share | $0.13 | $0.00, rounded |
| Net cash from/(used in) operating activities | $62,204 | $(25,925) |
| Ending cash outside trust | $161,771 | $391,728 |
At February 28, 2018, total assets were $71.8 million, including $71.6 million in the trust account; total liabilities were $3.2 million. Current liabilities were $1.5 million, including $771,400 of sponsor-related extension notes and a $201,268 non-interest-bearing Phunware note. Shareholders’ equity was $5.0 million; $63.5 million of redeemable shares was classified outside permanent equity. The trust held U.S. Treasury bills yielding approximately 1.5% annually. The filing reports no long-term debt, lease obligations, or off-balance-sheet financing arrangements.
Material changes versus the prior comparable period
Quarterly net loss increased to $363,835 from $11,528, principally as formation and operating costs rose by $500,710; trust investment income increased by $148,403 and partly offset the higher costs. Cash outside the trust declined from $391,728 at February 28, 2017 to $161,771 at February 28, 2018. Compared with November 30, 2017, accounts payable increased from $124,931 to $538,408, and total current liabilities increased from $741,731 to $1,521,576. Trust assets increased from $71,215,856 to $71,601,861.
Transaction, outlook, risks, and contingencies
- The merger agreement values Phunware at a $301 million enterprise value, subject to customary cash and debt adjustments. Phunware shareholders would receive newly issued equity in the combined company; Phunware options and warrants would be assumed or exchanged under the agreement. Stellar would convert to a Delaware corporation and change its name to Phunware, Inc. at closing.
- Stellar stated it would use good-faith efforts to have at least $40 million in cash available to the post-transaction company. Actual proceeds would depend on shareholder redemptions, transaction expenses, and other Stellar liabilities. The filing provides no assurance the merger would close; Phunware anticipated a 2018 closing.
- Stellar’s deadline to complete a business combination was May 24, 2018. Management said mandatory liquidation if no transaction were completed raised substantial doubt about Stellar’s ability to continue as a going concern. On failure to close, public shares generally would be redeemed from the trust, and warrants could expire worthless.
- Key risks include transaction completion and redemption levels, dilution from merger consideration and potential warrant or option issuance, limited operating cash outside the trust, and reliance on sponsor and Phunware notes. Management also described potential adverse effects if the combined company issued additional equity or debt.
- Stellar had a $1.725 million deferred underwriting fee payable only upon a completed business combination. It paid an affiliate $10,000 monthly for administrative services. No legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective; the filing did not include management’s internal-control assessment or an auditor attestation.
Important facts for investors to verify
- Whether the merger closed, and the final transaction terms, share issuance, and treatment of Phunware options and warrants.
- Trust-account cash remaining after redemptions, transaction expenses, liabilities, and the deferred underwriting fee, and whether at least $40 million was available to the combined company.
- Stellar’s May 24, 2018 business-combination deadline and the consequences if the transaction did not close by then.
- Phunware’s standalone revenue, profitability, cash flow, liquidity, and business risks; this filing does not provide those operating-company financial results.
- The amounts and repayment or conversion terms of outstanding sponsor and Phunware extension notes.