Phunware(PHUN) - 2019 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements 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 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] - Total liabilities also decreased from $25.7 million to $20.6 million, driven by lower accounts payable and the redemption of preferred stock[20] Condensed Consolidated Statements of Operations and Comprehensive Loss 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] - 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] Condensed Consolidated Statements of Cash Flows 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] - 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] Notes to Condensed Consolidated Financial Statements 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][37] - 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][67] - The most significant impact relates to the timing of revenue recognition for multiple-element arrangements involving MaaS subscriptions and application development services[64][67] - 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][90] - 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] Management's Discussion and Analysis of Financial Condition and Results of Operations Phunware's Q1 2019 revenue grew with improved gross margin and reduced operating expenses, despite declining backlog and retention Key Business Metrics 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 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 $6.7 million in Q1 2018[146][148] - This non-GAAP measure is used by management to compare operating performance on a consistent basis by excluding items like interest, taxes, depreciation, amortization, and stock-based compensation[146][148] Results of Operations Revenue growth was driven by platform subscriptions, improving gross profit and margins due to reduced operating expenses Revenue by Type (in thousands) | Revenue Type | Q1 2019 (in thousands) | Q1 2018 (in thousands) | Change ($ 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] - This was driven by higher margins in both Platform subscriptions (48.0% vs 40.1%) and Application transactions (77.9% vs 52.0%)[172] - 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][174][175][176] Liquidity and Capital Resources 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] - Net cash used in operating activities was $4.1 million for Q1 2019, an increase from $3.3 million in Q1 2018[179][181] - 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] Quantitative and Qualitative Disclosures About Market Risk This section is noted as not applicable for the reporting period - The company stated that this item is not applicable[193] Controls and Procedures 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] - New controls were implemented during the quarter to prepare financial statements under the new revenue standard, ASC 606[196] PART II OTHER INFORMATION Legal Proceedings 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] - 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] Risk Factors 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] - The company has a significant concentration of sales with key customers[211] - Fox Networks Group accounted for 63% of total revenue and Houston Methodist accounted for 13% for the quarter ended March 31, 2019[211] - 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][214] - 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][210] Unregistered Sales of Equity Securities and Use of Proceeds 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] - These sales were not registered under the Securities Act, relying on exemptions under Section 4(2) or Rule 701[219] Defaults Upon Senior Securities This section is noted as not applicable for the reporting period - The company stated that this item is not applicable[221] Mine Safety Disclosures This section is noted as not applicable for the reporting period - The company stated that this item is not applicable[222] Other Information There was no other information to report for this period - The company reported no information under this item[223] Exhibits 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]