Phunware, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial statements are unaudited; amounts below are in millions of dollars unless otherwise noted. Phunware provides a mobile software platform, related services, and mobile advertising transactions.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $3.13 | $5.64 | $7.98 | $16.46 |
| Gross profit | $2.23 | $3.22 | $5.23 | $8.71 |
| Gross margin | 71.3% | 57.1% | 65.5% | 52.9% |
| Operating loss | $(7.50) | $(2.29) | $(14.33) | $(8.53) |
| Net loss | $(8.57) | $(2.43) | $(16.04) | $(8.99) |
| Adjusted EBITDA (non-GAAP) | $(1.26) | $(1.52) | $(6.25) | $(7.14) |
Basic and diluted loss per share was $0.19 for Q3 and $0.38 for the nine-month period, compared with $0.06 and $0.25, respectively, in 2019. Weighted-average shares increased to 44.3 million in Q3 from 39.0 million.
Liquidity, cash flow, and debt
- At September 30, cash was $1.14 million and restricted cash was $0.09 million. Current assets were $2.76 million versus current liabilities of $26.91 million, a working-capital deficit of approximately $24.16 million. Total liabilities were $34.16 million and stockholders’ equity was a deficit of $4.81 million.
- Operating cash use was $6.52 million in the first nine months, compared with $5.90 million in 2019. Financing provided $7.42 million; cash and restricted cash increased by $0.87 million from year-end to $1.23 million.
- Reported debt principal totaled $8.65 million at quarter-end, including $2.85 million under the Paycheck Protection Program (PPP), Series A and B convertible notes, and other notes. The 2020 convertible notes mature December 31, 2021, carry 7% interest on unrestricted principal, require monthly cash installments at a 107% redemption price, and are convertible initially at $3.00 per share. The related warrant covers up to 2.16 million shares at $4.00.
- The company reported $2.56 million available for future advances under its receivables factoring facility. The PPP loan may be forgiven in whole or in part, but forgiveness is not assured.
Material changes and business developments
- Revenue fell 44.5% in Q3 and 51.5% for the nine-month period. Management attributed most of the decline to completion of the Fox Networks Group statement of work in 2019; Fox contributed approximately $3.1 million in Q3 2019 and $9.5 million in the first nine months of 2019. Advertising and app-store activity also declined.
- Q3 revenue included an acceleration associated with a customer contract termination; that customer represented 21% of quarterly revenue. Three customers accounted for 56% of Q3 revenue, and two customers accounted for another 41% in the first nine months, indicating significant customer concentration.
- Gross margin improved despite lower revenue, while operating loss widened. The company recorded a $4.5 million Uber settlement charge and $0.95 million of debt-extinguishment losses in Q3. Interest expense rose to $1.36 million from $0.15 million, partly reflecting new debt and amortization of discounts and financing costs. A $1.24 million warrant fair-value gain partly offset other expense.
- Phunware settled its Uber litigation for a total $6.0 million payment: insurers cover $1.5 million related to claims against individual defendants, and the company owes $4.5 million in installments through September 2021. The filing records the company’s $4.5 million share as a Q3 charge and accrued liability.
- During the first nine months, the company sold 1.30 million shares through its at-the-market (ATM) program for $1.49 million gross proceeds. After quarter-end through November 12, it sold a further 3.87 million shares for $3.26 million gross proceeds.
Outlook, risks, and contingencies
Management gave no numerical revenue or earnings guidance. It said it does not expect to be profitable in the near future and expects operating losses and negative operating cash flows to continue. Management concluded that substantial doubt exists about the company’s ability to continue as a going concern for one year after issuance of the statements; planned financing and cost reductions were not considered sufficiently assured to alleviate that doubt.
- COVID-19 disrupted customer businesses and events, contributed to reduced advertising activity, and created uncertainty around demand, collections, and access to capital. The company furloughed 37 employees, approximately 42% of its workforce, and had recalled five by September 30.
- The convertible-note terms create cash-payment, covenant, default-redemption, and dilution risks. A quarterly minimum available-cash covenant requires $0.5 million, subject to a cure right. Conversion, warrant exercise, and ATM issuance could materially dilute existing shareholders.
- The company expects that some PPP proceeds may be forgiven, but forgiveness and the company’s eligibility remain uncertain. A separate lawsuit challenges the PPP loan; the company disputes the claim and says the outcome cannot currently be estimated.
- A stockholder lawsuit concerning an IPO-related lockup seeks unspecified damages exceeding $1 million; the company disputes the claims. The Uber settlement remains subject to completion of payments and final resolution.
- Remaining performance obligations were $8.80 million, with management expecting 55% to be recognized within 12 months. Backlog plus deferred revenue was $8.61 million at quarter-end, down from $12.62 million at year-end 2019.
- Management reported effective disclosure controls at quarter-end and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Phunware can raise sufficient capital or otherwise fund operations, meet the convertible notes’ monthly cash payments, and maintain covenant compliance.
- Actual cash balances, cash burn, and payment timing for the $4.5 million Uber settlement and other current obligations.
- PPP loan forgiveness and the resolution of the related eligibility challenge.
- Revenue trends after the loss of Fox-related work, customer concentration, and whether the contract-termination revenue acceleration is recurring.
- Potential dilution from ATM sales, convertible-note conversion, warrants, and other equity awards.