Phunware, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Phunware provides a mobile software platform and related services. Financial figures below are in U.S. dollars; “$ millions” reflects amounts reported in thousands converted to millions.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $1.646 million | $2.640 million | Down 37.7% |
| Gross profit / gross margin | $0.954 million / 58.0% | $1.549 million / 58.7% | Gross profit down 38.4% |
| Operating expenses | $4.366 million | $5.411 million | Down 19.3% |
| Operating loss | $(3.412) million | $(3.862) million | Loss narrowed |
| Net loss | $(12.363) million | $(3.963) million | Loss increased substantially |
| Adjusted EBITDA (non-GAAP) | $(2.403) million | $(3.178) million | Loss narrowed |
| Operating cash flow | $(7.299) million | $(1.905) million | Cash use increased |
Platform subscriptions and services generated $1.521 million of revenue, down 36.4%; application transaction revenue was $0.125 million, down 49.8%. Management attributed the platform decline primarily to development, licensing and support work for a customer in 2020, and the transaction revenue decline mainly to lower app-store revenue. GAAP gross margin was nearly flat year over year. Adjusted gross margin, a non-GAAP measure, was 71.0%, versus 60.9%.
Balance sheet, liquidity and financing
- At March 31, cash was $23.469 million and restricted cash was $0.091 million, compared with cash of $3.940 million and restricted cash of $0.091 million at year-end 2020. Current assets were $26.298 million and current liabilities $30.394 million.
- Reported debt principal was approximately $15.076 million at quarter-end; the balance sheet showed $10.012 million of current maturities, $3.741 million of long-term debt and $0.195 million of related-party long-term debt, net of applicable discounts and classifications.
- Q1 financing provided $27.916 million net cash, including $29.705 million of net common-stock proceeds and $9.981 million of net borrowings, offset in part by $11.835 million of debt repayments. Shares outstanding rose to 71.211 million at March 31 from 56.380 million at December 31, 2020.
- After quarter-end, on April 5, the company paid $13.902 million to satisfy all obligations under its Series B Note. This included $11.718 million of principal, interest and make-whole, and $2.184 million for extinguishment. The filing does not give a post-payment debt balance.
- Deferred revenue was $4.234 million and backlog was $3.452 million at March 31, for combined billed and unbilled contract value of $7.686 million. Separately, remaining performance obligations were $7.768 million; the filing says 42% was expected to be recognized over the next 12 months.
Material changes and unusual items
- The net loss included $5.768 million of debt-extinguishment loss, $2.219 million of interest expense and $0.885 million of loss from remeasurement of warrant liability. Interest expense was up from $0.101 million in Q1 2020. These items explain much of the increase in net loss despite a narrower operating loss.
- Revenue and gross profit contracted, while operating expenses declined 19.3%. General and administrative expense fell 30.1%, largely due to lower headcount costs, lower legal fees following the Uber settlement, and bad-debt recovery; research and development expense rose 22.2%.
- Phunware adopted lease accounting standard ASC 842 on January 1, 2021, recognizing lease assets and liabilities. The March 31 balance sheet included a $1.723 million right-of-use asset and $1.977 million of lease liabilities. A $0.077 million impairment charge related to an Irvine office sublease was recorded in Q1.
- The company purchased $1.098 million of bitcoin, reported as digital currency/intangible assets; it recorded an immaterial impairment and made no sales during the quarter.
Outlook, risks and contingencies
- Management said it believed available cash was sufficient for projected operating requirements for at least 12 months from the filing date. It also said it did not expect near-term profitability and expected operating losses and negative operating cash flows to continue.
- No quantified revenue or earnings guidance was provided. Management identified future capital needs as dependent on growth, renewals, product development, sales and marketing investment, and market acceptance; additional financing may be needed and may not be available on acceptable terms.
- The $2.850 million Paycheck Protection Program loan remained outstanding. The company anticipated applying for forgiveness, but stated that forgiveness was not assured; it expected its first payment in Q3 2021.
- The company owed $3.0 million under its $4.5 million Uber settlement at March 31, payable in installments no later than September 30, 2021.
- In the Wild Basin shareholder litigation, plaintiffs sought unspecified damages exceeding $1.0 million; the company disputed the claims, and said the case was at an early discovery stage and loss could not be estimated. The company also filed a negligence action against former counsel WSGR; outcome was uncertain and damages were not specified.
- Phunware said it anticipated issuing PhunCoin to rights holders in 2021, but gave no assurance the Token Ecosystem would launch. It announced PhunToken sales beginning May 11, 2021; sales were immaterial as of the financial statement issuance date.
- On April 7, the company entered a new at-the-market sales agreement allowing up to $25 million of common-stock sales, with a 3% commission; it was not obligated to sell shares and had made no sales under the agreement as of the date described.
Important facts for investors to verify
- Whether revenue stabilizes after the decline in platform services and customer-related work, and whether the $7.686 million backlog plus deferred revenue converts to recognized revenue as expected.
- Cash and liquidity after the April 5 Series B Note payoff, subsequent operating cash use, and any use of the new $25 million ATM program; also assess potential dilution.
- The remaining debt obligations, PPP forgiveness and repayment status, and the timing and cash requirements of the Uber settlement.
- Developments and potential financial exposure in the Wild Basin and WSGR matters, as well as any other contingencies.
- Bitcoin valuation and impairment exposure, and progress, costs and obligations related to PhunCoin and PhunToken.