Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Exact name of registrant as specified in its charter) | Delaware | 26-4413774 | | --- | --- | | (State or other jurisdiction of | (I.R.S. Employer | | incorporation or organization) | Identification Number) | | 7800 Shoal Creek Blvd, Suite 230-S | | | Austin, TX | 78757 | | (Address of principal executive offices) | (Zi ...

PART I FINANCIAL INFORMATION [Financial Statements](index=6&type=section&id=Item%201.%20Financial%20Statements) Phunware reported increased net revenues and a reduced net loss in Q1 2019, while facing going concern uncertainties and adopting ASC 606 [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet reflects a decrease in total assets and liabilities from year-end 2018 to Q1 2019 | Balance Sheet Items | March 31, 2019 (Unaudited, in thousands) | December 31, 2018 (in thousands) | | :--- | :--- | :--- | | **Assets** | | | | Cash | $1,065 | $844 | | Accounts receivable, net | $2,738 | $3,606 | | Total current assets | $4,839 | $4,722 | | Goodwill | $25,846 | $25,821 | | Total assets | $31,434 | $36,881 | | **Liabilities & Equity** | | | | Accounts payable | $8,600 | $9,890 | | Total current liabilities | $16,103 | $19,974 | | Total liabilities | $20,627 | $25,677 | | Total stockholders' equity | $10,807 | $5,827 | - Total assets decreased from **$36.9 million** at year-end 2018 to **$31.4 million** as of March 31, 2019, primarily due to a decrease in restricted cash and accounts receivable[20](index=20&type=chunk) - Total liabilities also decreased from **$25.7 million** to **$20.6 million**, driven by lower accounts payable and the redemption of preferred stock[20](index=20&type=chunk) [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) The company significantly reduced its net loss in Q1 2019 due to lower operating expenses | Income Statement Items | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :--- | :--- | :--- | | Net revenues | $5,315 | $4,980 | | Gross profit | $2,698 | $2,113 | | Total operating expenses | $6,008 | $8,707 | | Operating loss | $(3,310) | $(6,594) | | Net loss | $(3,494) | $(7,164) | | Net loss per share, basic and diluted | $(0.12) | $(0.29) | - Net loss for Q1 2019 was **$3.5 million**, a significant improvement from the **$7.2 million** net loss in Q1 2018[22](index=22&type=chunk) - This was primarily due to a **31% reduction** in total operating expenses, which fell from **$8.7 million** to **$6.0 million** year-over-year[22](index=22&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash used in operating activities increased in Q1 2019, while financing activities were impacted by preferred stock redemption | Cash Flow Items | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,116) | $(3,296) | | Net cash provided by (used in) investing activities | $88 | $(201) | | Net cash (used in) provided by financing activities | $(1,277) | $3,389 | - Cash used in operating activities increased to **$4.1 million** in Q1 2019 from **$3.3 million** in Q1 2018[27](index=27&type=chunk) - Financing activities used **$1.3 million** in cash, driven by a **$6.2 million** redemption of Series A preferred stock, partially offset by **$5.7 million** in proceeds from warrant exercises[27](index=27&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Key notes include going concern uncertainty, ASC 606 adoption impact, ongoing litigation, and warrant exercises - The company has a history of operating losses and negative cash flows, leading management to conclude there is substantial doubt about its ability to continue as a going concern through one year from the issuance of the financial statements[36](index=36&type=chunk)[37](index=37&type=chunk) - On January 1, 2019, the company adopted the new revenue recognition standard ASC 606, which resulted in a **$1.087 million** decrease to the accumulated deficit[64](index=64&type=chunk)[67](index=67&type=chunk) - The most significant impact relates to the timing of revenue recognition for multiple-element arrangements involving MaaS subscriptions and application development services[64](index=64&type=chunk)[67](index=67&type=chunk) - The company is involved in a breach of contract lawsuit with Uber Technologies, Inc., seeking approximately **$3 million** for unpaid invoices, while Uber has filed a cross-complaint alleging fraud, with an unpredictable outcome[89](index=89&type=chunk)[90](index=90&type=chunk) - During Q1 2019, the company issued **11.0 million shares** of common stock from warrant exercises, generating approximately **$6.2 million** in gross proceeds from cash exercises[109](index=109&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Phunware's Q1 2019 revenue grew with improved gross margin and reduced operating expenses, despite declining backlog and retention [Key Business Metrics](index=32&type=section&id=Key%20Business%20Metrics) Key business metrics show declining total backlog, deferred revenue, and dollar-based revenue retention rate Backlog and Deferred Revenue (in thousands) | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--- | :--- | :--- | | Backlog | $12,943 | $16,730 | | Deferred revenue | $7,351 | $8,251 | | **Total** | **$20,294** | **$24,981** | Dollar-based Revenue Retention Rate | Period Ended | March 31, 2019 | March 31, 2018 | | :--- | :--- | :--- | | Rate | 98% | 134% | [Non-GAAP Financial Measures](index=33&type=section&id=Non-GAAP%20Financial%20Measures) Adjusted EBITDA improved significantly in Q1 2019, reflecting better operating performance excluding non-cash items Non-GAAP Performance (in thousands) | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :--- | :--- | :--- | | Adjusted gross profit | $2,723 | $2,132 | | Adjusted gross margin | 51.2% | 42.8% | | Adjusted EBITDA | $(3,204) | $(6,689) | - Adjusted EBITDA improved to a loss of **$3.2 million** in Q1 2019 from a loss of **$6.7 million** in Q1 2018[146](index=146&type=chunk)[148](index=148&type=chunk) - This non-GAAP measure is used by management to compare operating performance on a consistent basis by excluding items like interest, taxes, depreciation, amortization, and stock-based compensation[146](index=146&type=chunk)[148](index=148&type=chunk) [Results of Operations](index=38&type=section&id=Results%20of%20Operations) Revenue growth was driven by platform subscriptions, improving gross profit and margins due to reduced operating expenses Revenue by Type (in thousands) | Revenue Type | Q1 2019 (in thousands) | Q1 2018 (in thousands) | Change ($ in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Platform subscriptions and services | $4,821 | $4,004 | $817 | 20.4% | | Application transaction | $494 | $976 | $(482) | (49.4)% | | **Total revenue** | **$5,315** | **$4,980** | **$335** | **6.7%** | - Total gross profit increased by **27.7%** YoY to **$2.7 million**, with total gross margin expanding from **42.4%** to **50.8%**[172](index=172&type=chunk) - This was driven by higher margins in both Platform subscriptions (**48.0%** vs **40.1%**) and Application transactions (**77.9%** vs **52.0%**)[172](index=172&type=chunk) - Total operating expenses decreased by **31.0%** YoY, primarily due to reduced employee compensation costs from lower headcount across sales and marketing (**-62.3%**), general and administrative (**-11.4%**), and research and development (**-43.1%**)[173](index=173&type=chunk)[174](index=174&type=chunk)[175](index=175&type=chunk)[176](index=176&type=chunk) [Liquidity and Capital Resources](index=41&type=section&id=Liquidity%20and%20Capital%20Resources) The company faces going concern doubts due to continued operating losses and negative cash flows - The company has a history of operating losses and negative operating cash flows, which are expected to continue, raising substantial doubt about its ability to continue as a 'going concern'[186](index=186&type=chunk) - Net cash used in operating activities was **$4.1 million** for Q1 2019, an increase from **$3.3 million** in Q1 2018[179](index=179&type=chunk)[181](index=181&type=chunk) - Financing activities in Q1 2019 resulted in a net cash use of **$1.3 million**, mainly due to the **$6.2 million** redemption of Series A preferred stock, which was partially offset by **$5.7 million** in proceeds from warrant exercises[184](index=184&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=43&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section is noted as not applicable for the reporting period - The company stated that this item is not applicable[193](index=193&type=chunk) [Controls and Procedures](index=43&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective, with new controls implemented for ASC 606 adoption - The company's Certifying Officers concluded that disclosure controls and procedures were effective as of the end of the reporting period (March 31, 2019)[194](index=194&type=chunk) - New controls were implemented during the quarter to prepare financial statements under the new revenue standard, ASC 606[196](index=196&type=chunk) PART II OTHER INFORMATION [Legal Proceedings](index=44&type=section&id=Item%201.%20Legal%20Proceedings) Phunware is in a legal dispute with Uber Technologies, Inc. over unpaid invoices and fraud allegations - Phunware filed a breach of contract complaint against Uber Technologies, Inc. seeking approximately **$3 million** for unpaid invoices from Q1 2017[198](index=198&type=chunk) - Uber filed a cross-complaint against Phunware and another party, asserting fraud and contract-based claims related to its mobile advertising campaign, with a trial date set for August 12, 2019[198](index=198&type=chunk) [Risk Factors](index=44&type=section&id=Item%201A.%20Risk%20Factors) Key risks include ASC 606 impact, operating volatility, capital raising uncertainty, PhunCoin risks, customer concentration, and stock price volatility - The adoption of the new revenue recognition standard (ASC 606) could make revenue more volatile and difficult to predict, and increases compliance costs[202](index=202&type=chunk) - The company has a significant concentration of sales with key customers[211](index=211&type=chunk) - Fox Networks Group accounted for **63%** of total revenue and Houston Methodist accounted for **13%** for the quarter ended March 31, 2019[211](index=211&type=chunk) - The company's stock price has been and may continue to be highly volatile due to factors such as a limited public float, trading by pre-merger shareholders, potential dilution from warrant exercises, and short-selling activity[212](index=212&type=chunk)[214](index=214&type=chunk) - There is no assurance that the PhunCoin token will ever be issued, and difficulties with the offering or development could result in claims against the company and have a material adverse effect on its cash position[209](index=209&type=chunk)[210](index=210&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=48&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company issued 50,772 common shares from option exercises in Q1 2019, generating $24,000 - In Q1 2019, the company issued **50,772 shares** of common stock from the exercise of stock options, for total proceeds of approximately **$24,000**[218](index=218&type=chunk) - These sales were not registered under the Securities Act, relying on exemptions under Section 4(2) or Rule 701[219](index=219&type=chunk) [Defaults Upon Senior Securities](index=49&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section is noted as not applicable for the reporting period - The company stated that this item is not applicable[221](index=221&type=chunk) [Mine Safety Disclosures](index=49&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is noted as not applicable for the reporting period - The company stated that this item is not applicable[222](index=222&type=chunk) [Other Information](index=49&type=section&id=Item%205.%20Other%20Information) There was no other information to report for this period - The company reported no information under this item[223](index=223&type=chunk) [Exhibits](index=49&type=section&id=Item%206.%20Exhibits) This section indexes exhibits filed with the Form 10-Q, including corporate documents and officer certifications - Lists exhibits filed with the Form 10-Q, including CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1) and XBRL data files[226](index=226&type=chunk)

Form 10-K Filing Information [Registrant Information](index=1&type=section&id=Registrant%20Information) This section provides basic registrant information for Phunware, Inc., including its jurisdiction of incorporation, IRS identification number, principal executive offices, telephone number, and securities registered on the Nasdaq Capital Market - Phunware, Inc. is incorporated in Delaware, with IRS Employer Identification Number **26-4413774**, and its principal executive offices are located at 7800 Shoal Creek Blvd, Suite 230-S, Austin, Texas[2](index=2&type=chunk) Registered Securities Information | Security Class | Registered Exchange | | :--- | :--- | | Common Stock, par value $0.0001 per share | Nasdaq Capital Market | | Warrants, exercisable for one share of Common Stock | Nasdaq Capital Market | | Units, each consisting of one share of Common Stock and one Warrant | Nasdaq Capital Market | [Filing Status](index=1&type=section&id=Filing%20Status) Phunware, Inc. is designated as a non-accelerated filer, a smaller reporting company, and an emerging growth company, having filed all required reports - The company is not a large accelerated filer, nor an accelerated filer, but is a smaller reporting company and an emerging growth company[4](index=4&type=chunk)[5](index=5&type=chunk) - The company has filed all required reports in the past 12 months and has complied with filing requirements in the past 90 days, having electronically submitted all Interactive Data Files[4](index=4&type=chunk) EXPLANATORY NOTE [Business Combination and Corporate Changes](index=3&type=section&id=Business%20Combination%20and%20Corporate%20Changes) This section details the business combination between Stellar Acquisition III, Inc. and Phunware, Inc., resulting in Stellar's renaming to Phunware, Inc., a Delaware corporation, with its securities trading on Nasdaq since December 28, 2018, and a fiscal year-end change to December 31 - On December 26, 2018, Stellar Acquisition III, Inc. completed its reincorporation and merged, with Stellar renamed "Phunware, Inc." and Phunware becoming its wholly-owned subsidiary[7](index=7&type=chunk) - Post-merger, the registrant's common stock and warrants began trading on the Nasdaq Capital Market on December 28, 2018, under ticker symbols "PHUN" and "PHUNW"[7](index=7&type=chunk) - The company's Board of Directors approved changing the fiscal year-end from November 30 to December 31, effective immediately[8](index=8&type=chunk) - As of March 13, 2019, the company had **35,201,259** shares of common stock issued and outstanding[8](index=8&type=chunk) TABLE OF CONTENTS SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS [Nature of Forward-Looking Statements](index=5&type=section&id=Nature%20of%20Forward-Looking%20Statements) This report contains forward-looking statements regarding the company's future operating performance, financial condition, business strategy, and objectives, identified by specific terminology, which are based on current expectations but involve risks and uncertainties that may cause actual results to differ materially - Forward-looking statements cover the company's future operating performance, financial condition, business strategy, and operating objectives, identified by words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "possible," "potential," "predict," "project," "should," "will," "would"[12](index=12&type=chunk) - These statements are based on current expectations and beliefs but involve multiple risks, uncertainties (some beyond the company's control), and other assumptions that could cause actual results or performance to differ materially from forward-looking statements[13](index=13&type=chunk) - The company undertakes no obligation to update or revise any forward-looking statements, except as required by applicable securities laws[13](index=13&type=chunk) PART I [Business](index=6&type=section&id=Item%201.%20Business) Phunware, Inc. is a mobile application development platform company offering a Multiscreen-as-a-Service (MaaS) platform to help enterprises manage and monetize their mobile app portfolios, operating across mobile cloud software, media, big data, and crypto network markets, with a focus on growth through product expansion, customer engagement, market reach, and strategic acquisitions [Business Combination](index=6&type=section&id=Business%20Combination) Phunware, Inc. completed a business combination with Stellar Acquisition III, Inc. on December 26, 2018, with Stellar renamed Phunware, Inc. and becoming the accounting acquirer, resulting in the redemption of Stellar's public shares and the issuance of Series A convertible preferred stock, with approximately 27.3 million common shares and 18.2 million warrants outstanding post-merger - Phunware, Inc. completed a business combination with Stellar Acquisition III, Inc. on December 26, 2018, with Stellar renamed "Phunware, Inc." and Phunware becoming its wholly-owned subsidiary[17](index=17&type=chunk) - The merger resulted in the redemption of **1,813,487** shares of Stellar common stock, totaling approximately **$19.3 million**[18](index=18&type=chunk) - Issued **6,000** shares of Series A 8% convertible preferred stock, raising **$6 million** in cash[19](index=19&type=chunk) - Post-merger, approximately **27.3 million** common shares and approximately **18.2 million** warrants were outstanding[20](index=20&type=chunk) - This business combination was accounted for as a reverse merger and recapitalization, with Phunware as the accounting acquirer and predecessor[26](index=26&type=chunk) [Business Overview](index=8&type=section&id=Business%20Overview) Phunware Inc. is a pioneer in the Multiscreen-as-a-Service (MaaS) platform, offering a fully integrated enterprise cloud platform to manage, engage, and monetize mobile app portfolios and audiences at scale, serving enterprise clients undergoing digital transformation through SaaS, DaaS, and app transaction media services - Phunware Inc. is a pioneer in the Multiscreen-as-a-Service (MaaS) platform, providing a fully integrated enterprise cloud platform for engaging, managing, and monetizing mobile app portfolios and audiences[27](index=27&type=chunk) - The company creates a proprietary Phunware ID database through its platform for data subscription services and app transaction revenue streams, aiming to enhance marketing campaign performance, target high-value users, and optimize spending[28](index=28&type=chunk) - The company offers Software-as-a-Service (SaaS), Data-as-a-Service (DaaS), and app transaction media services, with a business model encompassing recurring revenue from subscriptions, transactions, and services[29](index=29&type=chunk) - Target customers are enterprise companies with large digital, mobile, marketing, and information technology budgets undergoing digital transformation[29](index=29&type=chunk) [Our Industry](index=8&type=section&id=Our%20Industry) Phunware operates in four rapidly evolving markets: mobile cloud software, media, big data, and crypto networks, driven by advancements in cloud computing, software-defined infrastructure, mobility, data analytics, IoT, and decentralization, demonstrating significant growth potential and market size - The company participates in four rapidly growing markets: mobile cloud software, media, big data, and crypto networks[30](index=30&type=chunk) Market Size and Growth | Market | 2017 Data | 2018 Forecast/2021 Forecast | | :--- | :--- | :--- | | Mobile Cloud Software | Global smartphone users downloaded over 175 billion apps, consuming over $86 billion | App economy to exceed $110 billion in 2018 | | Media Market | US mobile ad revenue $21.7 billion in H1 2017 | Digital media spending (incl. mobile) to exceed $225 billion by 2021, accounting for 49.6% of total media investment | | Big Data Market | $130 billion in 2016 | To exceed $203 billion by 2020 | | Crypto Networks | Exponential growth in 2017-2018 | Expected to continue growing, with cryptocurrency market size larger than many national currencies and major payment networks | [PhunCoin™](index=10&type=section&id=PhunCoin%E2%84%A2) Phunware is developing the PhunCoin crypto ecosystem, a reward market and data exchange platform where users earn PhunCoin for providing information, redeemable for goods and services, built on Stellar blockchain technology and funded via Rule 506(c) rights issuance, enhancing core business and protecting user data with self-sovereign identity technology - PhunCoin will be used in the PhunCoin Ecosystem, a reward market and data exchange platform where users earn PhunCoin for providing information, and can redeem it for goods and services[37](index=37&type=chunk) - Development funding for the PhunCoin Ecosystem is raised through a Rule 506(c) private placement offering of future PhunCoin Rights to accredited investors[39](index=39&type=chunk) Rule 506(c) Offering Proceeds Expected Use | Use | Percentage | | :--- | :--- | | Sales & Marketing | 35% | | Research & Development | 35% | | Ecosystem Development | 20% | | General & Administrative | 10% | - PhunCoin will be built on Stellar blockchain technology and is planned for future listing on compliant trading platforms[43](index=43&type=chunk)[48](index=48&type=chunk) - PhunCoin user accounts will be created using self-sovereign identity technology, giving users full control over their identity and data, protected by biometric technology[52](index=52&type=chunk)[63](index=63&type=chunk) [Our Solution](index=14&type=section&id=Our%20Solution) Phunware's business model combines subscriptions, transactions, and services, leveraging its MaaS platform to assist clients across the four phases of the mobile app lifecycle (strategy, creation, launch, engagement/monetization/optimization) by offering MaaS software components, app frameworks, vertical solutions, app transactions, and data services, with plans to integrate crypto network functionalities - The company's business model includes subscriptions, transactions, and services, aimed at helping clients manage their mobile app portfolios across the four phases of the mobile app lifecycle (strategy, creation, launch, engagement, monetization, and optimization)[56](index=56&type=chunk) - MaaS platform products and solutions include: software (e.g., SDKs, APIs, scripts, portals, integrations, covering business intelligence and analytics,