Phunware, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; dollar amounts below are in millions unless noted. Phunware provides a mobile software platform, services and application transactions.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1.436 | $2.213 | $3.082 | $4.853 |
| Gross profit | $0.312 | $1.445 | $1.266 | $2.994 |
| Gross margin | 21.7% | 65.3% | 41.1% | 61.7% |
| Operating expenses | $4.506 | $4.415 | $8.872 | $9.826 |
| Operating loss | $(4.194) | $(2.970) | $(7.606) | $(6.832) |
| Net loss | $(8.293) | $(3.511) | $(20.656) | $(7.474) |
| Adjusted EBITDA (non-GAAP) | $(2.743) | $(1.817) | $(5.146) | $(4.994) |
Platform subscriptions and services revenue fell 41.7% in Q2 and 38.8% year to date, principally because a customer generated higher development, licensing and support revenue in 2020. Application transaction revenue rose 34.7% in Q2, partly due to PhunToken sales, but fell 13.2% for the first half as app-store revenue declined. Q2 platform-services gross margin dropped to 8.6% from 63.0%; management cited about $0.5 million in labor costs on a customer project whose obligations had not yet been delivered, and expected to fulfill at least some in Q3.
Cash, debt and liquidity
- At June 30, cash was $2.714 million (cash plus restricted cash: $2.805 million); current assets were $5.732 million and current liabilities $16.158 million, implying negative working capital of about $10.426 million.
- Six-month operating cash use was $14.371 million, compared with $4.750 million in 2020. Investing cash use was $1.497 million, all for digital-currency purchases. Financing provided $14.626 million, including equity proceeds, partly offset by debt repayments. Cash and restricted cash declined $1.226 million from year-end.
- Debt principal totaled about $3.998 million at June 30, including a $2.850 million PPP loan. The company had repaid its 2020 Series B convertible note in April. The PPP forgiveness application was submitted July 7 and remained under SBA review; forgiveness was not assured.
- The company had $1.500 million remaining due under its Uber settlement, payable by September 30, 2021. It also had $1.202 million of PhunCoin deposits recorded as a liability.
- Backlog was $4.173 million and deferred revenue $3.789 million, down from combined $9.066 million at December 31, 2020. Remaining performance obligations were $7.990 million; 34% was expected to be recognized over the next 12 months.
Material changes, outlook and risks
- Revenue declined 35.1% in Q2 and 36.5% for the first half. Net loss widened substantially, driven in part by debt-related costs: first-half interest expense was $4.064 million and loss on extinguishment of debt was $7.952 million.
- Other notable Q2 items included a $0.776 million impairment of digital currencies and a $0.663 million gain on remeasurement of warrant liability. The company held $0.773 million of digital currencies at June 30; under its accounting policy, impairment write-downs are not reversed for later price increases.
- Phunware reported an accumulated deficit of $166.459 million and negative operating cash flow. The filing says these conditions raised substantial doubt about its ability to continue as a going concern. Management said it believed the doubt was alleviated by sales-pipeline and channel-partner activity, potential digital-currency sales and access to equity financing, but cautioned that these plans might not succeed and financing was not assured.
- The company said it expected further common-stock sales to help fund operations and did not expect to be profitable in the near future. It provided no specific revenue or earnings guidance. Its $25 million at-the-market facility remained available; by June 30 it had sold shares for about $1.0 million net, and through August 13 it reported additional net proceeds of about $1.8 million.
- COVID-19 uncertainty was cited as a factor in revenue, backlog and cash falling short of expectations. Revenue was highly concentrated in the United States (99% in Q2); two customers represented 21% and 13% of Q2 revenue.
- Contingencies include a stockholder lawsuit over a prior lock-up period and Phunware’s claims against former counsel; outcomes and potential losses were not estimable. Management recorded no expense for the stockholder matter because loss was not considered probable or reasonably estimable.
Important facts for investors to verify
- Actual revenue conversion, renewals and delivery progress on backlog and the customer project associated with the Q2 labor costs.
- Cash runway, negative working capital, settlement payment timing, and the pace and terms of further ATM equity sales and resulting dilution.
- Whether the SBA forgives the PPP loan and whether management’s financing and operating plans adequately address the going-concern uncertainty.
- Debt-related expenses, remaining debt obligations, and the valuation and impairment exposure of digital currencies and warrants.
- Developments and potential financial impact of the disclosed litigation and PhunCoin ecosystem plans.