PHUNWARE, INC. References in this section to "we," "us," "our," or "the Company" refer to
The following discussion and analysis ofPhunware's financial condition and results of operations should be read in conjunction withPhunware's condensed consolidated financial statements and the related notes to those statements presented in "Part I - Item 1. Financial Statements." In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.Phunware's actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed in the section titled "Risk Factors" and elsewhere in this Report. Certain figures, such as interest rates and other percentages, included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our condensed consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.
Overview
Phunware, Inc. offers a fully integrated software platform that equips companies with the products, solutions and services necessary to engage, manage and monetize their mobile application portfolios globally at scale. Our MaaS platform provides the entire mobile lifecycle of applications, media and data in one login through one procurement relationship. Our offerings include:
•Enterprise mobile software development kits (SDKs) including content management,
location-based services, marketing automation, business intelligence and analytics,
alerts, notifications and messaging, audience engagement and audience monetization;
•Integration of our SDK licenses into existing applications maintained by our
customers, as well as custom application development and support services;
•Cloud-based vertical solutions, which are off-the-shelf, iOS- and Android-based mobile
application portfolios, solutions and services that address: the patient experience for
healthcare, the shopper experience for retail, the fan experience for sports, the
traveler experience for aviation, the luxury resident experience for real estate, the
luxury guest experience for hospitality, the student experience for education and the
generic user experience for all other verticals and applications; and
•Application transactions for mobile audience building, user acquisition, application
discovery, audience engagement and monetization, including our engagement-driven
digital asset PhunToken.
We also offer and sell pre-packaged and custom high-end personal computer systems for gaming, streaming and cryptocurrency mining enthusiasts.
We intend to continue investing for long-term growth. We have invested and
expect to continue investing in the expansion of our ability to market, sell and
provide our current and future products and services to customers globally. We
also expect to continue investing in the development and improvement of new and
existing products and services to address customers' needs. We currently do not
expect to be profitable in the near future.
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Key Business Metrics
Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. We believe that the most important of these measures include backlog and deferred revenue.
Backlog and Deferred Revenue. Backlog represents future amounts to be invoiced under our current agreements. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice. Until such time as these amounts are invoiced, they are not recorded in revenues, deferred revenue, accounts receivable or elsewhere in our condensed consolidated financial statements, and are considered by us to be backlog. We expect backlog to fluctuate up or down from period to period for several reasons, including the timing and duration of customer contracts, varying billing cycles and the timing and duration of customer renewals. We reasonably expect approximately 40% of our backlog as ofMarch 31, 2022 will be invoiced during the subsequent 12-month period, primarily due to the fact that our contracts are typically one to three years in length. In addition, our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenues as of the end of a reporting period. Together, the sum of deferred revenue and backlog represents the total billed and unbilled contract value yet to be recognized in revenues, and provides visibility into future revenue streams.
The following table sets forth our backlog and deferred revenue:
March 31, 2022 December 31, 2021
(in thousands)
Backlog $ 2,817 $ 3,316
Deferred revenue 4,271 5,272
Total backlog and deferred revenue $ 7,088 $ 8,588
Non-GAAP Financial Measures
Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA
We report our financial results in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). We also use certain non-GAAP financial measures that fall within the meaning of Securities and Exchange Commission Regulation G and Regulation S-K Item 10(e), which may provide users of the financial information with additional meaningful comparison to prior period results. Our non-GAAP financial measures include adjusted gross profit, adjusted gross margin and adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") (our "non-GAAP financial measures"). Management uses these measures (i) to compare operating performance on a consistent basis, (ii) to calculate incentive compensation for its employees, (iii) for planning purposes including the preparation of its internal annual operating budget and (iv) to evaluate the performance and effectiveness of operational strategies. Our non-GAAP financial measures should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue or net income (loss), as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. Our non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations include:
•Non-cash compensation is and will remain a key element of our overall long-term
incentive compensation package, although we exclude it as an expense when evaluating
our ongoing operating performance for a particular period;
•Our non-GAAP financial measures do not reflect the impact of certain cash charges
resulting from matters we consider not to be indicative of ongoing operations, and;
•Other companies in our industry may calculate our non-GAAP financial measures
differently than we do, limiting their usefulness as comparative measures.
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We compensate for these limitations to our non-GAAP financial measures by relying primarily on our GAAP results and using our non-GAAP financial measures only for supplemental purposes. Our non-GAAP financial measures include adjustments for items that may not occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other peer companies over time. For example, it is useful to exclude non-cash, stock-based compensation expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and these expenses can vary significantly across periods due to timing of new stock-based awards. We may also exclude certain discrete, unusual, one-time, or non-cash costs in order to facilitate a more useful period-over-period comparison of its financial performance. Each of the normal recurring adjustments and other adjustments described in this paragraph help management with a measure of our operating performance over time by removing items that are not related to day-to-day operations or are non-cash expenses.
The following table sets forth the non-GAAP financial measures we monitor.
Three Months Ended March 31,
(in thousands, except percentages) 2022 2021
Adjusted gross profit (1) $ 1,817 $ 1,168
Adjusted gross margin (1) 26.8 % 71.0 %
Adjusted EBITDA (2) $ (4,220) $ (2,403)
(1)Adjusted gross profit and adjusted gross margin are non-GAAP financial
measures. We believe that adjusted gross profit and adjusted gross margin
provide supplemental information with respect to gross profit and gross margin
regarding ongoing performance. We define adjusted gross profit as net revenues
less cost of revenue, adjusted to exclude one-time revenue adjustments,
stock-based compensation and amortization of intangible assets. We define
adjusted gross margin as adjusted gross profit as a percentage of net revenues.
(2)Adjusted EBITDA is a non-GAAP financial measure. We believe Adjusted EBITDA
provides helpful information with respect to operating performance as viewed by
management, including a view of our business that is not dependent on (i) the
impact of our capitalization structure and (ii) items that are not part of
day-to-day operations. We define adjusted EBITDA as net loss plus (i) interest
expense, (ii) income tax expense, (iii) depreciation, (iv) amortization, and
further adjusted for (v) non-cash impairment and valuation adjustments and (vi)
stock-based compensation expense.
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Reconciliation of Non-GAAP Financial Measures
The following tables set forth a reconciliation of the most directly comparable GAAP financial measure to each of the non-GAAP financial measures discussed above.
Three Months Ended March 31 ,
(in thousands, except percentages) 2022 2021
Gross profit$ 1,771 $
954
Add back: Amortization of intangibles -
4
Add back: Stock-based compensation 46 210 Adjusted gross profit$ 1,817 $ 1,168 Adjusted gross margin 26.8 % 71.0 % Three Months Ended March 31, (in thousands) 2022 2021 Net loss$ (14,917) $ (14,307) Add back: Depreciation and amortization 186 33 Add back: Interest expense 381 2,219 EBITDA (14,350) (12,055) Add back: Stock-based compensation 564 1,055 Add back: Loss on extinguishment of debt - 5,768 Add back: Impairment of digital assets 9,353 - Add back: Fair value adjustment of warrant liability 213 2,829 Adjusted EBITDA$ (4,220) $ (2,403) 23
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Components of Results of Operations
Revenue and Gross Profit
There are a number of factors that impact the revenue and margin profile of the product, service and technology offerings we provide, including, but not limited to, solution and technology complexity, technical expertise requiring the combination of products and types of services provided, as well as other elements that may be specific to a particular client solution.
Platform Revenue and Gross Profit
Our platform revenue consists of software subscriptions, application development services and support and application transactions, which comprise of of in-app advertising and PhunToken sales.
Subscription revenue is derived from software license fees, which comprise subscription fees from customers licensing our Software Development Kits (SDKs), that includes accessing the MaaS platform. Subscription revenue from SDK licenses gives the customer the right to access our MaaS platform.
Application development revenue is derived from development services around designing and building new applications or enhancing existing applications. Support revenue is comprised of support and maintenance fees of customer applications, software updates and technical support for application development services for a support term. From time to time, we may also provide professional services by outsourcing employees' time and materials to customers. We generate application transaction revenue by charging advertisers to deliver advertisements (ads) to users of mobile connected devices. Depending on the specific terms of each advertising contract, we generally recognize revenue based on the activity of mobile users viewing these ads. Fees from advertisers are commonly based on the number of ads delivered or views, clicks or actions by users on mobile advertisements delivered, and we recognize revenue at the time the user views, clicks or otherwise acts on the ad. We sell ads through several offerings: cost per thousand impressions and cost per click. During 2021, we announced the commencement of the selling of PhunToken, PhunToken is designed to reward consumers for their activity, such as watching branded videos, completing surveys and visiting points of interest. We recognize revenue related to PhunToken at time of delivery to a customer's ethereum-based wallet. Platform gross profit is equal to subscriptions and services revenue less the cost of personnel and related costs for our support and professional services employees, external consultants, stock-based compensation and allocated overhead. Costs associated with our development and project management teams are generally recognized as incurred. Costs directly attributable to the development or support of applications relating to subscription customers are included in cost of sales, whereas costs related to the ongoing development and maintenance ofPhunware's MaaS platform are expensed in research and development. Furthermore, gross profit related to application transactions is equal to application transaction revenue less cost of revenue associated with application transactions, which is impacted by the cost of advertising traffic we pay to our suppliers, the amount of traffic which we can purchase from those suppliers and ethereum blockchain fees paid to deliver PhunToken.
As a result, platform gross profit may fluctuate from period to period.
Hardware Revenue and Gross Profit
We acquired Lyte inOctober 2021 . Revenue from Lyte is primarily derived from the sale of high-performance personal computers. Lyte computers are sold with a variety of pre-packaged solutions, as well as customizable solutions selected by our customers. A majority of Lyte's customers pay us via credit card payments, which is managed through a third party processor. We recognize revenue at the time a completed unit ships from our facility. Hardware gross profit is equal to hardware revenue less the costs associated with the assembly of computers. hardware gross profit is impacted by the costs that we pay for parts incorporated into a Lyte computer system, as well as labor costs of our employees directly attributable to building computer systems and shipping. Demand may exceed available supply at times, which may hamper our ability to deliver computer systems timely and may increase the costs at which we can obtain inventory needed for computer builds. Customizable solutions we offer our customers may also vary from time to time. As a result, computer hardware revenue and gross profit may fluctuate from period to period. Although we plan to invest in Lyte for future growth, we may experience revenue and gross profit fluctuations as a result of seasonality. 24
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Gross Margin
Gross margin measures gross profit as a percentage of revenue. Gross margin is generally impacted by the same factors that affect changes in the mix of platform and hardware revenue.
Operating Expenses
Our operating expenses include sales and marketing expenses, general and administrative expenses, research and development expenses, depreciation and amortization of acquired intangible assets. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and, in sales and marketing expense, commissions. Legal settlements pertaining to litigation brought as a result of the Company's operations is also included in operating expenses. Sales and Marketing Expense. Sales and marketing expense is comprised of compensation, commission expense, variable incentive pay and benefits related to sales personnel, along with travel expenses, other employee related costs, including stock-based compensation and expenses related to marketing programs and promotional activities. We expect our sales and marketing expense will increase in absolute dollars as we increase our sales and marketing organizations as we plan to increase revenue but may fluctuate as a percentage of our total revenue from period to period. General and Administrative Expense. General and administrative expense is comprised of compensation and benefits of administrative personnel, including variable incentive pay and stock-based compensation, bad debt expenses and other administrative costs such as facilities expenses, professional fees and travel expenses. We expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of theSEC and listing standards of Nasdaq, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our general and administrative function to support the growth of our business. As a result, we expect that our general and administrative expenses will increase in absolute dollars but may fluctuate as a percentage of our total revenue from period to period.
Research and Development Expense. Research and development expenses consist primarily of employee compensation costs and overhead allocation. We believe that continued investment in our platform is important for our growth. As a result, we expect our research and development expenses will increase in absolute dollars as our business grows but may fluctuate as a percentage of revenue from period to period.
Interest Expense
Interest expense includes interest related to our outstanding debt, including amortization of discounts and deferred issuance costs.
Refer to Note 6 "Debt" in the notes to the condensed consolidated financial statements included Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on our debt offerings.
We also may seek additional debt financings to fund the expansion of our business or to finance strategic acquisitions in the future, which may have an impact on our interest expense.
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Table of Contents Results of OperationsNet Revenues Three Months Ended March 31, Change (in thousands, except percentages) 2022 2021 Amount % Net Revenues Platform revenue$ 2,492 $ 1,646 $ 846 51.4 % Hardware revenue 4,286 - 4,286 100.0 % Net revenues$ 6,778 $ 1,646 $ 5,132 311.8 % Platform revenue as percentage of total revenue 36.8 % 100.0 % Hardware revenue as percentage of total revenue 63.2 %
- %
Net revenues increased
Platform revenue increased$0.8 million , or 51.4%, for the three months endedMarch 31, 2022 , compared to the corresponding period in 2021, primarily due to PhunToken sales of$1.0 million , as we commenced the sale of PhunToken in the second quarter of 2021. These increases were partially offset by greater platform revenues for development, licensing and support services provided to a customer in 2021, as compared to 2022. This customer is identified as "Customer E" in Note 4, Revenue, in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this quarterly report on Form 10-Q.
Hardware revenue of
Cost of Revenues, Gross Profit and Gross Margin
Three Months Ended March 31, Change
(in thousands, except percentages) 2022 2021 Amount %
Cost of Revenues
Platform revenue $ 1,067 $ 692 $ 375 54.2 %
Hardware revenue 3,940 - 3,940 100.0 %
Total cost of revenues $ 5,007 $ 692 $ 4,315 623.6 %
Gross Profit
Platform revenue 1,425 $ 954 $ 471 49.4 %
Hardware revenue 346 $ - $ 346 100.0 %
Total gross profit $ 1,771 $ 954 $ 817 85.6 %
Gross Margin
Platform revenue 57.2 % 58.0 %
Hardware revenue 8.1 % - %
Total gross margin 26.1 % 58.0 %
Total gross profit increased $0.8 million , or 85.6% for the three months ended
March 31, 2022 , when compared to the corresponding period of 2021, due to the
revenue items described above.
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Operating Expenses
Three Months Ended March 31, Change
(in thousands, except percentages) 2022 2021 Amount %
Operating expenses
Sales and marketing $ 1,485 $ 556 $ 929 167.1 %
General and administrative 4,305 2,758 1,547 56.1 %
Research and development 1,003 1,052 (49) (4.7) %
Total operating expenses $ 6,793 $ 4,366 $ 2,427 55.6 %
Sales and Marketing
Sales and marketing expense increased $0.9 million , or 167.1% for the three
months ended March 31, 2022 compared to the corresponding period of 2021,
primarily due to an increase of $0.3 million of employee compensation costs due
to higher headcount and $0.7 million of marketing related expenditures mostly
related to Lyte.
General and Administrative
General and administrative expense increased $1.5 million , or 56.1% for the
three months ended March 31, 2022 compared to the corresponding period of 2021,
primarily due to an increase of $0.7 million in payroll costs related to
employee retention credit received during 2021, $0.3 million in legal fees, $0.2
million related to amortization of trade name related to Lyte acquisition, $0.2
million in bad debt recoveries that occurred in 2021 and $0.2 million in other
general and administrative expenses. This increase was minimally offset by in
decrease in stock-based compensation.
Research and Development
Research and development expense decreased$0.05 million , or (4.7)%, for the three months endedMarch 31, 2022 , compared to the corresponding period of 2021. Increased headcount period-over-period was allocated to customer-driven projects and recorded in cost of sales above. No other individual expense category represented a significant increase when compared to the corresponding period of 2021. 27
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Other expense
Three Months Ended March 31, Change
(in thousands, except percentages) 2022 2021 Amount %
Other income (expense)
Interest expense $ (381) $ (2,219) $ 1,838 (82.8) %
Loss on extinguishment of debt - (5,768) 5,768 (100.0) %
Impairment of digital assets (9,353) - (9,353) 100.0 %
Fair value adjustment of warrant liability (213) (2,829) 2,616 (92.5) %
Other income (expense) 52 (79) 131 (165.8) %
Total other expense $ (9,895) $ (10,895) $ 1,000 (9.2) %
Other expense decreased $1.0 million , or (9.2)%, for the three months ended
March 31, 2022 , compared to the corresponding period of 2021, primarily due to
an impairment of our digital asset holdings. These losses were mostly offset due
to losses on extinguishment of debt related to payments on our 2020 Convertible
Notes in 2021, fair value adjustment of our outstanding warrant issued to the
holder of our 2020 Convertible Notes and a decrease in interest expense, as we
had paid off multiple debt obligations in 2021.
Refer to Note 2, "Summary of Significant Accounting Policies" of the notes to
the condensed consolidated financial statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q for further discussion regarding our digital
asset holdings. Further, reference is made to Note 6 "Debt" of the notes to the
condensed consolidated financial statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q for further discussion on our debt holdings.
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Liquidity and Capital Resources
As ofMarch 31, 2022 , we held total cash of$10.8 million , all of which was held inthe United States . We have a history of operating losses and negative operating cash flows. As we continue to focus on growing our revenues, we expect these trends to continue into the foreseeable future. We may, if needed, sell our digital asset holdings for cash to fund our ongoing operations. As ofMarch 31, 2022 , we held 644 bitcoins and 1,287 ethereum, of which consist of the majority of the digital assets recorded on our balance sheet. The digital asset market historically has been characterized by significant volatility in its price, limited liquidity and trading volumes compared to sovereign currencies markets, relative anonymity, a developing regulatory landscape, susceptibility to market abuse and manipulation, and various other risks inherent in its entirely electronic, virtual form and decentralized network. During times of instability in the digital asset market, we may not be able to sell our digital asset holdings at reasonable prices, or at all. As a result, our digital assets are less liquid than our existing cash and cash equivalents and may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents. OnOctober 18, 2021 , we closed the acquisition of Lyte with an adjusted purchase price of approximately$11.0 million (subject to an earn-out provision). Pursuant to terms of the stock purchase agreement, future cash payments consist of$1.125 million , as adjusted for working capital items, onJune 30, 2022 , and up to$1.25 million on the first anniversary of closing, as an earn-out payment based upon Lyte achieving certain annual revenue milestones as provided in the purchase agreement. We currently believe Lyte will achieve the annual revenue milestone and we will owe the full amount of the contingent consideration on the first annual anniversary of closing. In connection with the acquisition of Lyte, we entered into a note purchase agreement and completed the sale of an unsecured promissory note with an original principal amount of$5.2 million in a private placement that closed onOctober 18, 2021 . After deducting all transaction cost, net cash proceeds to the Company were$4.7 million . No interest will accrue on the promissory note unless and until the occurrence of an event of default (as defined in the promissory note). We may prepay outstanding balance of the promissory note earlier than it is due with a prepayment premium of 110%. Beginning onJanuary 15, 2022 and on the same day of each month thereafter until the promissory note is paid in full, we are required to make a monthly amortization payments in the amount of$574 thousand which are considered prepayments subject to the prepayment premium. OnFebruary 1, 2022 , we filed a Form S-3, which was subsequently declared effective by theSEC onFebruary 9, 2022 , pursuant to which we may issue up to$200 million in common stock, preferred stock, warrants and units. Contained therein, was a prospectus supplement in which we may sell up to$100 million of our common stock in an "at the market offering" pursuant to an At Market Issuance Sales Agreement we entered into withH.C. Wainwright & Co., LLC onJanuary 31, 2022 . To date, we have not sold any shares of our common stock under the sales agreement with H.C. Wainwright or issued any securities under our Form S-3 filed onFebruary 1, 2022 . As a result of the financing events described above, while our liquidity risk continues as a result of continued losses and the ongoing and evolving effects of the COVID-19 pandemic, management believes it has sufficient cash on hand for at least one year following the filing date of this Quarterly Report on Form 10-Q. Our future capital requirements will depend on many factors, including our pace of growth, subscription renewal activity, the timing and extent of spend to support development efforts, the pace at which we can scale Lyte, the expansion of sales and marketing activities and the market acceptance of our products and services. We believe that it is likely we will in the future enter into arrangements to acquire or invest in complementary businesses, technologies and intellectual property rights. We may be required to seek additional equity or debt financings, or issue securities subject to the effective registration statement described above. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired and/or on acceptable terms, our business, operating results and financial condition could be adversely affected. 29
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The following table summarizes our cash flows for the periods presented:
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