Phunware, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results; dollar amounts below are in thousands unless stated otherwise. Phunware provides a mobile software platform and related services and advertising transactions.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $2,213 | $5,510 | $4,853 | $10,825 |
| Gross profit / margin | $1,445 / 65.3% | $2,788 / 50.6% | $2,994 / 61.7% | $5,486 / 50.7% |
| Operating loss | $(2,970) | $(2,924) | $(6,832) | $(6,234) |
| Net loss | $(3,511) | $(3,067) | $(7,474) | $(6,561) |
| Adjusted EBITDA (non-GAAP) | $(1,817) | $(2,411) | $(4,994) | $(5,615) |
| Basic and diluted loss per share | $(0.08) | $(0.08) | $(0.18) | $(0.19) |
- Revenue and drivers: Q2 revenue fell 59.8%; first-half revenue fell 55.2%. Platform subscriptions and services revenue declined 60.3% in Q2 and 55.5% year to date, principally because the Fox Networks Group statement of work ended in September 2019. Fox represented about $3.1 million of Q2 2019 revenue and $6.4 million of first-half 2019 revenue. Application transaction revenue also declined, attributed mainly to reduced or ended advertising campaigns.
- Margins and expenses: GAAP gross margin rose to 65.3% in Q2 and 61.7% for the first half, from 50.6% and 50.7%, respectively. Operating expenses decreased 22.7% in Q2 and 16.2% in the first half, reflecting lower headcount and spending; higher stock-based compensation partly offset savings. First-half stock-based compensation was $1,750.
- Cash flow: First-half operating cash use was $4,750, versus $5,866 in 2019. Financing provided $4,712, compared with $314 used in 2019; investing provided no cash in 2020. Cash and restricted cash declined to $245 from $362 at year-end 2019. Of the June balance, $154 was cash and $91 restricted cash.
- Balance sheet and liquidity: Current assets were $1,642 against current liabilities of $20,030, a working capital deficit of $18,388. Total liabilities were $27,707 and stockholders’ equity was $514. Debt totaled $5,698, including $2,850 of PPP borrowing, $1,258 net carrying value of the senior convertible note, $905 of promissory notes, and related-party borrowings. Factored receivables payable were $363; $2,637 remained available for future factoring advances. Accounts receivable was $928, net of a $3,190 allowance.
- Contract visibility: Backlog was $3,719 and deferred revenue $5,856 at June 30, totaling $9,575, down from $12,620 at year-end. Remaining performance obligations were $9,856; 47% was expected to be recognized within 12 months.
Material developments, outlook and risks
- Going concern: Management concluded substantial doubt existed about the company’s ability to continue as a going concern for one year after issuance. It cited recurring losses, negative operating cash flows, limited cash, and dependence on additional financing or expense reductions; prospective funding plans were not assured. The company said it did not expect to be profitable in the near future.
- COVID-19 and cost actions: Management said the pandemic disrupted businesses and events relevant to its application transaction business and created uncertainty for customer demand, collections, operations and capital access. The company adopted remote work and furloughed 37 employees, about 42% of its workforce, in March. It said the duration and financial impact could not be reasonably estimated.
- Financing after quarter-end: On July 15, 2020, Phunware repaid the March senior convertible note for $2,084 and issued new Series A and Series B convertible notes with stated principal of $4,320 and $17,280, respectively. The Series B was funded by an investor promissory note rather than immediate cash; the filing reports $1,751 of aggregate net cash proceeds after the payoff and transaction costs. The notes carry 7% interest, mature December 31, 2021, and are convertible at $3.00 per share with full-ratchet anti-dilution protection. Monthly amortization is cash-payable at 107%; the financing also included a three-year warrant for up to 2.16 million shares at $4.00 and a $500 quarter-end available-cash covenant. These terms create repayment and potential dilution risks.
- PPP: The $2,850 loan bears 0.98% interest and matures in April 2022. Forgiveness depends on qualifying use and approval; the company anticipated only that a portion might be forgiven and disclosed possible eligibility review, repayment and penalty risks. A lawsuit alleging unjust enrichment related to the PPP loan was pending; outcome and potential loss were not estimable.
- Litigation: Uber’s amended cross-complaint alleged approximately $17 million in fraud-related claims and sought treble and other damages. On August 12, 2020, after the quarter, the court struck Phunware’s complaint and answer such that default judgment should be entered, with a default prove-up hearing to follow. The company intended to contest the order and appeal; it could not estimate the loss or range. Other disclosed matters included a stockholder suit seeking unspecified damages in excess of $1 million and an attorney-fee suit for $690, which the company said it was exploring settlement of; the filing also disclosed a $78 discovery sanction in the Uber matter.
- Other business items: COVID-19 redirected development resources away from the PhunCoin Token Ecosystem; the company gave no assurance when or whether it would launch. PhunCoin deposits were $1,202, and the company said PhunToken had not been sold. Revenue was concentrated: American Made Media Consultants represented 36% of Q2 revenue; Houston Methodist and World Wide Technology represented 13% and 11%, respectively.
- Controls and outlook: Management reported disclosure controls effective as of June 30 and no material changes in internal control during the quarter. No quantitative revenue or earnings guidance was provided. Management cautioned that results and the effects of COVID-19 were uncertain.
Important facts for investors to verify
- Available cash, near-term cash burn, and financing availability relative to the substantial going-concern doubt and working capital deficit.
- Cash actually received and obligations under the July 2020 convertible financing, including note netting, repayment terms, covenants and potential dilution from conversions and warrants.
- Developments in the Uber default-judgment process and appeal, as well as potential exposure in the other legal proceedings.
- PPP loan forgiveness status, eligibility review, and any repayment or penalty consequences.
- Whether revenue can recover after the Fox contract ended and advertising campaigns declined, and whether backlog and deferred revenue convert to recognized revenue as expected.
- Customer concentration, collectability of receivables, and the significance of the $3,190 allowance against receivables.