Phunware, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; financial statements are unaudited. Amounts are in millions unless stated otherwise. Phunware provides a mobile software platform, services and in-app advertising transactions.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $2.640 | $5.315; down 50.3% |
| Gross profit / margin | $1.549 / 58.7% | $2.698 / 50.8% |
| Operating expenses | $5.411 | $6.008 |
| Operating loss | $(3.862) | $(3.310) |
| Net loss | $(3.963); $(0.10) per share | $(3.494); $(0.12) per share |
| Adjusted EBITDA (non-GAAP) | $(3.178) | $(3.204) |
| Cash used in operations | $(1.905) | $(4.116) |
At March 31, cash was $0.833 and restricted cash was $0.091. Current assets of $2.221 compared with current liabilities of $21.053, a working-capital deficit of $18.832. Total debt was $4.054, including a $3.000-principal senior convertible note issued in March; its carrying amount was $2.339. Stockholders’ equity was $1.353, down from $4.026 at year-end 2019. Accounts receivable was $0.913; total deferred revenue was $6.332.
Material changes and operating drivers
- Platform subscriptions and services revenue fell 50.4% to $2.391, primarily because the Fox Networks Group statement of work ended in September 2019; Fox contributed approximately $3.3 million in Q1 2019. Application transaction revenue fell 49.6% to $0.249, mainly due to reduced or ended advertising campaigns.
- Gross margin improved to 58.7% from 50.8%, which management attributed in part to improved margins on contracts delivered during the quarter. Operating expenses declined 9.9%, but the smaller revenue base contributed to a larger operating loss.
- Stock-based compensation rose to $0.635 from $0.011. Weighted-average shares increased to 40.095 million from 30.264 million; basic and diluted loss per share were the same because potential shares were antidilutive.
- Revenue remained concentrated: American Made Media Consultants represented 31% of Q1 revenue and Houston Methodist 11%. Fox represented 63% in Q1 2019 and none in Q1 2020. Backlog plus deferred revenue declined to $10.894 from $12.620 at December 31, 2019; remaining performance obligations were $11.219, with 45% expected to be recognized over the next 12 months.
Cash, financing and outlook
Operating cash use improved year over year, while financing provided $2.543, chiefly from borrowings. The March senior convertible note generated approximately $2.371 net proceeds and carries 7% interest, monthly principal installments of approximately $0.143 beginning April 30, and conversion and redemption features that may create dilution or cash obligations. It also requires at least $0.200 of available cash at each quarter-end; the company reported compliance at March 31. Related-party bridge loans of $0.560 carry 10% interest.
After quarter-end, the company received a $2.850 Paycheck Protection Program loan on April 10, 2020, bearing 0.98% interest and maturing in 2022. Some proceeds may qualify for forgiveness, but the company could not estimate the amount, if any. A lawsuit filed April 24 alleges the company was unjustly enriched in connection with the PPP loan; the company disputed the claims.
Management provided no specific revenue or earnings guidance and said it did not expect near-term profitability. The company concluded there was substantial doubt about its ability to continue as a going concern for one year after issuance, citing recurring operating losses and negative operating cash flows and the need for additional financing or expense reductions. Planned financing and cost measures were not assured. COVID-19 disrupted businesses and events served by the company; management said the impact and duration could not be reasonably estimated. The company moved to work-from-home arrangements and furloughed 37 employees, approximately 42% of its workforce, on March 27.
Risks, contingencies and unusual items
- Nasdaq notified the company on April 17 that its share price did not meet the $1.00 minimum bid requirement. The stated compliance date was December 28, 2020. The company also reported equity of approximately $1.4 million, below Nasdaq’s $2.5 million equity standard; delisting could impair liquidity and financing access and trigger a senior-note default.
- Uber litigation includes Phunware’s claim for approximately $3 million in unpaid invoices and Uber’s cross-claims, which allege approximately $17 million in fraudulently obtained payments and seek treble and other damages. The company made no prediction about the outcome; the trial was rescheduled to September 21, 2020.
- Other disclosed litigation includes a stockholder suit seeking unspecified damages exceeding $1 million and a legal-fee suit seeking $0.690 million, which was recorded in accounts payable. The filing says loss estimates are not possible for certain matters.
- The company had $1.202 million of PhunCoin deposits and said it anticipated issuing tokens in 2020, but the Token Ecosystem launch date was uncertain; PhunCoin would have no usefulness until that ecosystem is operational. No Phun tokens had been sold as of March 31.
Important facts for investors to verify
- Whether the company secured sufficient financing and improved operating cash flow to address the going-concern uncertainty.
- Subsequent cash, PPP loan forgiveness or repayment, and effects of required senior-note installments, conversion terms and potential dilution.
- Progress on Nasdaq bid-price and stockholders’ equity compliance, and any effect on note default or financing options.
- Revenue renewals, customer concentration, backlog and deferred-revenue conversion, particularly following the Fox contract’s completion.
- Developments and potential financial exposure from the Uber, stockholder, legal-fee and PPP-related litigation.