Phunware(PHUN) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements for Phunware, Inc. as of September 30, 2019, for three and nine-month periods Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 (Unaudited) | Dec 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $3,946 | $4,722 | | Goodwill | $25,786 | $25,821 | | Total Assets | $30,425 | $36,881 | | Total Current Liabilities | $19,457 | $19,974 | | Total Liabilities | $23,944 | $25,677 | | Total Stockholders' Equity | $6,481 | $5,827 | Condensed Consolidated Statement of Operations Highlights (in thousands) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | $5,637 | $5,215 | $16,462 | $24,380 | | Gross Profit | $3,219 | $2,508 | $8,705 | $15,737 | | Operating Loss | $(2,292) | $(3,341) | $(8,526) | $(5,269) | | Net Loss | $(2,426) | $(3,520) | $(8,987) | $(6,212) | | Net Loss Per Share | $(0.06) | $(0.14) | $(0.25) | $(0.24) | Condensed Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(5,899) | $(5,500) | | Net cash provided by investing activities | $70 | $451 | | Net cash (used in) provided by financing activities | $(409) | $4,903 | | Net decrease in cash and restricted cash | $(6,276) | $(186) | | Cash and restricted cash at end of period | $68 | $122 | - The company has a history of operating losses and negative cash flows, and management has concluded there is substantial doubt about its ability to continue as a going concern through one year from the financial statement issuance date. The financial statements do not include any adjustments related to this uncertainty[35][36][37] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2019 net revenue up 8.1% YoY, nine-month down 32.5%, and addresses critical liquidity and going concern Key Business Metrics (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Backlog | $6,564 | $16,730 | | Deferred revenue | $7,335 | $8,251 | | Total backlog and deferred revenue | $13,899 | $24,981 | - The dollar-based revenue retention rate for platform subscriptions and services remained stable at 97% for the periods ended September 30, 2019 and 2018[170] Net Revenues Breakdown (in thousands) | Revenue Type | Three Months Ended Sep 30, 2019 | Change vs. 2018 | Nine Months Ended Sep 30, 2019 | Change vs. 2018 | | :--- | :--- | :--- | :--- | :--- | | Platform subscriptions and services | $5,152 | +18.5% | $15,065 | +1.8% | | Application transaction | $485 | -44.0% | $1,397 | -85.4% | | Total Net Revenues | $5,637 | +8.1% | $16,462 | -32.5% | - The company's contractual obligations with its key customer, Fox Networks Group, were completed as of September 30, 2019. Fox accounted for 55% and 58% of net revenues for the three and nine months ended September 30, 2019, respectively[201] - The company has a history of operating losses and negative cash flows, which raises substantial doubt about its ability to continue as a 'going concern'. Management is exploring additional capital raising through debt or equity but notes these sources are not assured[226] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that this section is not applicable - The company has determined that quantitative and qualitative disclosures about market risk are not applicable for this reporting period[232] Item 4. Controls and Procedures Management concluded disclosure controls were effective, noting new controls for ASC 606 adoption during the period - Based on an evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[235] - During the nine months ended September 30, 2019, the company implemented new controls to prepare financial statements under the new revenue standard, ASC 606. No other material changes to internal control over financial reporting were identified[237] PART II - OTHER INFORMATION Item 1. Legal Proceedings Details ongoing litigation with Uber, involving Phunware's $3M claim and Uber's $17M cross-complaint for fraud - Phunware is in a legal dispute with Uber Technologies, Inc. Phunware is seeking ~$3 million for unpaid invoices, while Uber has filed a cross-complaint[240] - Uber's cross-complaint alleges fraud and civil RICO violations against Phunware and certain current and former employees, claiming it was fraudulently billed for approximately $17 million and is seeking treble damages, punitive damages, and attorneys' fees[240] Item 1A. Risk Factors Outlines significant risks: Fox contract completion, digital asset uncertainties, goodwill impairment, and capital needs - A major risk is the concentration of sales with Fox Networks Group, whose statement of work was completed on September 30, 2019. Fox represented 55% of total revenue for Q3 2019, and the loss of this revenue could have a material adverse effect[247] - The company faces significant uncertainty regarding the financial accounting and regulatory regime for its digital assets, PhunCoin and Phun, which could negatively impact its business and financial statements[248][258] - Goodwill comprises a significant portion of total assets ($25.8 million, or 85% of total assets as of September 30, 2019). A decline in stock price or weakening economic conditions could lead to a material, non-cash impairment charge[262][264] - The company requires significant additional capital to fund operations as it has a history of operating losses and negative working capital. Failure to secure financing could force it to delay, reduce, or cease operations[268][269] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no unregistered sales of equity securities related to employee benefit plans during the quarter - The company reported no unregistered sales of equity securities related to employee benefit plans during the quarter[278] Item 3. Defaults Upon Senior Securities The company states that this section is not applicable - The company reports no defaults upon senior securities[279] Item 4. Mine Safety Disclosures The company states that this section is not applicable - The company reports that mine safety disclosures are not applicable[280] Item 5. Other Information The company states that this section is not applicable - The company reports no other information for this period[281] Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including lease amendments and officer certifications - The report includes several exhibits, such as amendments to lease agreements for office space in Austin, TX and San Diego, CA, and certifications by the Principal Executive Officer and Principal Financial Officer[283]