Phunware, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed April 7, 2022. This is an annual report, not a standalone fourth-quarter report. Phunware provides mobile software subscriptions, application development and advertising services, and, following its October 2021 acquisition of Lyte Technology, high-performance computers.
Financial performance
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $10.6 million | $10.0 million |
| Gross profit / margin | $3.6 million / 33.9% | $6.6 million / 66.4% |
| Operating loss | $16.8 million | $17.5 million |
| Net loss | $53.5 million | $22.2 million |
| Basic and diluted loss per share | $0.71 | $0.50 |
| Cash used in operating activities | $22.5 million | $11.0 million |
| Cash used in investing activities | $46.4 million | None |
| Cash provided by financing activities | $88.0 million | $14.6 million |
At year-end, cash was $23.1 million, total assets $99.3 million, and total liabilities $34.0 million. Digital assets were carried at $32.6 million. Debt was $5.2 million principal, shown net of discount as $4.9 million current debt; no long-term debt was reported. Lease liabilities totaled approximately $1.5 million. Backlog plus deferred revenue was $8.6 million.
Changes versus 2020
- Revenue rose 6.4%, but platform subscriptions and services fell 41.7% to $5.3 million. Management attributed the comparison in part to a large 2020 customer, which represented 32% of revenue that year and none in 2021.
- Lyte contributed $3.1 million of hardware revenue after its October acquisition; Phunware reported a $0.6 million operating loss from Lyte after closing. Application transaction revenue increased 150.8% to $2.2 million, including $1.1 million of PhunToken sales.
- Gross profit declined 45.6%, and total gross margin fell to 33.9%, mainly reflecting the lower-margin business mix and weaker platform-services margin. Platform-services margin was 30.3%, versus 65.1% in 2020; hardware margin was 2.5%.
- Net loss widened substantially, with other expense rising to $37.1 million. Major items included an $18.1 million warrant-liability fair-value charge, $9.4 million digital-asset impairment, $8.0 million debt-extinguishment loss, and a $2.9 million PPP-loan forgiveness gain. The 2020 period included a $4.5 million Uber settlement charge.
- Operating cash use more than doubled. The company funded operations and investments with equity and debt financing; 2021 financing cash flow included $94.7 million net proceeds from common-stock sales.
Outlook, risks and unusual items
- Management said it did not expect to be profitable in the near future and expected continued investment and operating losses. It believed available cash was sufficient for at least one year after filing, while noting that additional financing might be needed and was not assured.
- The company bought approximately 632 bitcoin for an aggregate purchase price of about $37.0 million, or roughly $58,477 per bitcoin on average. Its accounting policy records impairment when prices fall below cost, without recording subsequent price recoveries until sale; 2021 impairment was $9.4 million. Digital-asset price, custody, cybersecurity and regulatory risks are significant.
- The Lyte acquisition’s consideration was approximately $10.6 million at the acquisition-date accounting estimate, with contingent and other payments subject to the agreement. Phunware planned to move Lyte operations to Texas in 2022 and expand its reach; execution, demand, supply and low hardware margins are relevant risks.
- PhunCoin had not been issued by year-end; $1.2 million of rights proceeds remained recorded as a liability. The company anticipated issuance in 2022 but gave no assurance of a Token Ecosystem launch. PhunToken sales began in 2021; token adoption, marketability and regulatory treatment remain uncertain.
- Management identified a material weakness in financial reporting controls involving accounting for an adjustment to a warrant’s terms. It implemented remediation steps but had not tested them for a sufficient period to conclude the weakness was remediated. Disclosure controls were reported effective; management concluded internal control over financial reporting was not effective.
- Legal matters include the Wild Basin shareholder dispute, refiled in Delaware in February 2022, and arbitration with former counsel WSGR, which seeks fees of $4.3 million recorded in accounts payable. The company said outcomes may be materially adverse but could not estimate potential losses for certain matters.
- The financial-statement auditor issued an unqualified opinion on the financial statements, but was not engaged to audit internal control effectiveness. The auditor identified digital-asset accounting and disclosures as a critical audit matter.
Most important facts to verify
- Whether operating cash burn, subscription declines and Lyte’s margins improve, and how much additional capital the business may require.
- The current value, custody arrangements and impairment exposure of bitcoin and other digital assets, including any subsequent purchases or sales.
- Progress in remediating and testing the material weakness, and whether future filings report effective controls.
- Lyte’s performance against acquisition earn-out targets, outstanding acquisition payments and the costs and results of its Texas relocation.
- Developments in the WSGR arbitration and Wild Basin litigation, and the status and practical prospects of PhunCoin and the Token Ecosystem.
- Potential dilution from equity issuance: the company had an effective $200 million shelf registration and a $100 million at-the-market facility after year-end; it reported no sales under the new facility as of the filing.