Phunware, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Phunware completed its reverse merger with Stellar Acquisition III on December 26, 2018; the transaction was accounted for as a reverse merger and recapitalization, so the historical financial statements principally reflect Phunware’s results.
Business context
Phunware provides a mobile application platform combining enterprise software subscriptions and services, application advertising transactions, and data services. Its proposed PhunCoin blockchain ecosystem remained in development and was not generating revenue at year-end. The common stock began trading on Nasdaq as PHUN on December 28, 2018.
Financial performance and liquidity
| Metric (USD millions, except per-share data) | FY2018 | FY2017 |
|---|---|---|
| Revenue | $30.883 | $26.722 |
| Gross profit / gross margin | $19.081 / 61.8% | $11.008 / 41.2% |
| Operating loss | $(6.863) | $(25.616) |
| Net loss | $(9.803) | $(25.938) |
| Adjusted EBITDA (non-GAAP) | $(8.569) | $(24.073) |
| Operating cash flow | $(6.592) | $(16.989) |
| Investing cash flow | $0.377 | $(0.027) |
| Financing cash flow | $6.816 | $4.615 |
Revenue grew 15.6%. Platform subscriptions and services increased 17.7% to $19.409 million; application transaction revenue rose 12.1% to $11.474 million. Gross profit increased 73.3%, but included a $6.322 million release of a previously accrued partner revenue-share liability recorded as revenue. Management also cited centralized media purchasing as contributing to improved application transaction margins. The company remained loss-making.
Operating expenses fell 29.2% to $25.944 million, including lower sales and marketing and R&D spending, primarily associated with reduced employee and contractor headcount. Other expense rose to $3.314 million, including $2.202 million of other expense related primarily to the business combination, $0.724 million of interest expense, and a $0.334 million digital-currency impairment.
At December 31, cash was $0.844 million and restricted cash was $5.500 million. Current assets were $4.722 million versus current liabilities of $19.974 million. The balance sheet also reported $2.434 million of factored receivables payable and $1.993 million of related-party notes payable; the latter was subsequently waived and forgiven. Operating cash outflow improved from 2017 but remained significant. No material off-balance-sheet arrangements were reported.
Backlog plus deferred revenue was $24.981 million, down from $28.516 million. Dollar-based revenue retention declined to 94% from 141%. Fox Networks Group accounted for 42% of 2018 revenue and Fetch Media for 21%, versus 44% and 11%, respectively, in 2017.
Material changes, outlook, and risks
- The auditor and management identified substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, negative operating cash flows, and a substantial working-capital deficiency. Management said operations require additional external funding and that financing plans were not assured.
- Management stated it did not expect to be profitable in the near future. The filing provides no quantified revenue or earnings guidance.
- The December 2018 business combination generated only approximately $0.4 million of cash proceeds after public-share redemptions. A concurrent $6.0 million Series A preferred financing included $5.5 million placed in restricted escrow. The preferred stock carried an 8% rate and redemption provisions; subsequent to year-end, 5,500 of 6,000 shares were redeemed for $5.720 million.
- PhunCoin rights proceeds totaled $0.990 million through December 31, 2018, recorded as deferred revenue. The planned ecosystem, token issuance, regulatory pathway, and ability to raise material additional proceeds were uncertain.
- Customer concentration, dependence on advertising partners, competition, data privacy and cybersecurity obligations, and evolving digital-asset regulation are significant risks. The Uber dispute remained pending: Phunware sought approximately $3 million in unpaid invoices, while Uber asserted cross-claims without specifying damages. The filing made no prediction on the outcome.
- Revenue from the new ASC 606 standard could be more volatile; the company planned adoption on January 1, 2019 and was still assessing the financial impact.
- After year-end, the company reported cash warrant exercises for approximately $5.8 million gross proceeds and cashless exercises of 8.3 million warrants resulting in about 7.5 million shares. These transactions materially affected share count and potential dilution.
Most important facts for investors to verify
- Available unrestricted liquidity, near-term cash needs, and the status and terms of any new financing; assess the continuing going-concern risk.
- Cash and share-count effects of Series A redemptions, warrant exercises, and any remaining preferred-stock obligations.
- Whether revenue and gross-margin performance can be sustained without the $6.322 million partner-liability release, and the underlying trend in application transactions.
- Renewals and revenue exposure to Fox and Fetch, including the deterioration in dollar-based retention to 94%.
- Progress, funding, legal and regulatory feasibility, and accounting treatment of PhunCoin; the filing does not establish that the ecosystem will launch.
- Developments and potential financial exposure in the Uber litigation.