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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

For the quarterly period ended September 30, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-37862

PHUNWARE, INC.

(Exact name of registrant as specified in its charter)


Delaware						26-4413774
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

7800 Shoal Creek Blvd

Suite 230-S

Austin

78757

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: 512-693-4199

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:

Trading Symbol(s)

Name of Each Exchange on Which Registered:

Common Stock, par value $0.0001 per share

PHUN

The NASDAQ Capital Market

Warrants to purchase one share of Common Stock

PHUNW

The NASDAQ Capital Market

As of November 11, 2019, 39,124,023 shares of common stock, par value $0.0001 per share, were issued and outstanding.

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EXPLANATORY NOTE

On December 26, 2018, Stellar Acquisition III, Inc., a Republic of the Marshall Islands corporation incorporated in December 2015 (“Stellar”), deregistered as a corporation in the Republic of the Marshall Islands and domesticated as a corporation incorporated under the laws of the State of Delaware upon the filing with and acceptance by the Secretary of State of Delaware of the certificate of domestication in accordance with Section 388 of the Delaware General Corporation Law (the “Domestication”). Upon the effectiveness of the Domestication, Stellar became a Delaware corporation and, upon the consummation of the Business Combination (as defined below), Stellar changed its corporate name to “Phunware, Inc.” (the “Successor” or the “Company”) and all outstanding securities of Stellar were deemed to constitute outstanding securities of the Successor. Also on December 26, 2018, STLR Merger Subsidiary Inc., a wholly-owned subsidiary of Stellar (“Merger Sub”), merged with and into Phunware, Inc. (“Phunware”), a corporation incorporated in Delaware in February 2009, with Phunware surviving the merger (the “Merger”) and becoming a wholly-owned subsidiary of the Successor (the “Business Combination” or “Reverse Merger and Recapitalization”). Upon the consummation of the Business Combination, Phunware changed its corporate name to “Phunware OpCo, Inc.” As of the open of trading on December 28, 2018, the common stock and warrants of the registrant began trading on the Nasdaq Capital Market as “PHUN” and “PHUNW,” respectively.

In connection with the consummation of the Business Combination, on December 26, 2018, the board of directors of the Successor approved a change of its fiscal year end from November 30 to a calendar year ending December 31, effective immediately. Accordingly, the new fiscal year will begin on January 1 and end on December 31.

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		PAGE
PART I	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	2
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018	3
	Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

PART II	OTHER INFORMATION	38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44

	Signatures	46

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report includes forward-looking statements. All statements other than statements of historical facts contained in this Report, including statements regarding our future results of operations and financial position, business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. These risks and others described under “Risk Factors” may not be exhaustive.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Report. In addition, even if our results of operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Report, those results or developments may not be indicative of results or developments in subsequent periods.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

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Phunware, Inc.

Condensed Consolidated Balance Sheet

(In thousands, except per share information)


	September 30, 2019		December 31, 2018
	(Unaudited)
Assets
Current assets:
Cash	$	68	$	844
Accounts receivable, net	3,241		3,606
Prepaid expenses and other current assets	637		272
Total current assets	3,946		4,722

Property and equipment, net	38		66
Goodwill	25,786		25,821
Intangible assets, net	315		521
Deferred tax asset – long term	64		64
Restricted cash	—		5,500
Other assets	276		187
Total assets	$	30,425	$	36,881

Liabilities, redeemable convertible preferred stock, and stockholders’ equity
Current liabilities:
Accounts payable	$	9,563	$	9,890
Accrued expenses	3,978		3,028
Deferred revenue	3,168		2,629
PhunCoin deposits	1,202		—
Factored receivables payable	1,546		2,434
Short term notes payable - related party	—		1,993
Total current liabilities	19,457		19,974

Convertible note payable (see Note 5)	250		—
Deferred tax liability	64		64
Deferred revenue	4,167		5,622
Deferred rent	6		17
Total liabilities	23,944		25,677

Commitments and contingencies (see Note 6)	—		—
Redeemable convertible preferred stock, $0.0001 par value (see Note 8)	—		5,377

Stockholders’ equity
Common stock, $0.0001 par value (see Note 9)	4		3
Additional paid in capital	126,651		118,062
Accumulated other comprehensive loss	(454)		(418)
Accumulated deficit	(119,720)		(111,820)
Total stockholders’ equity	6,481		5,827
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity	$	30,425	$	36,881

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Phunware, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share information)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Net revenues	$	5,637	$	5,215	$	16,462	$	24,380
Cost of revenues	2,418		2,707		7,757		8,643
Gross profit	3,219		2,508		8,705		15,737

Operating expenses:
Sales and marketing	705		1,241		2,094		4,573
General and administrative	3,754		2,937		11,699		10,744
Research and development	1,052		1,671		3,438		5,689
Total operating expenses	5,511		5,849		17,231		21,006
Operating loss	(2,292)		(3,341)		(8,526)		(5,269)

Other income (expense):
Interest expense	(145)		(148)		(484)		(533)
Fair value adjustment for warrant liabilities	—		—		—		(54)
Impairment of digital currencies	—		—		—		(334)
Other income (expense)	11		(31)		28		(22)
Total other expense	(134)		(179)		(456)		(943)
Loss before taxes	(2,426)		(3,520)		(8,982)		(6,212)
Income tax expense	—		—		(5)		—
Net loss	(2,426)		(3,520)		(8,987)		(6,212)
Other comprehensive loss
Cumulative translation adjustment	(33)		(16)		(36)		(43)
Comprehensive loss	$	(2,459)	$	(3,536)	$	(9,023)	$	(6,255)

Net loss per share, basic and diluted	$	(0.06)	$	(0.14)	$	(0.25)	$	(0.24)

Weighted-average shares used to compute net loss per share, basic and diluted	39,027		25,885		36,034		25,411

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Phunware, Inc.

Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity

(In thousands)

(Unaudited)


	Preferred Stock			Common Stock						Additional Paid-in Capital		Accumulated Deficit		Other Comprehensive Loss	Total Stockholders’ Equity
	Shares	Amount	Shares	Amount
Balance - June 30, 2019	—	—	38,902	$	4	$	125,854	$	(117,294)	$	(421)	$	8,143
Exercise of stock options, net of vesting of restricted shares	—	—	179	—		113		—		—		113
Vesting of restricted stock units	—	—	23	—		—		—		—		—
Stock-based compensation expense	—	—	—	—		684		—		—		684
Cumulative translation adjustment	—	—	—	—		—		—		(33)		(33)
Net loss	—	—	—	—		—		(2,426)		—		(2,426)
Balance - September 30, 2019	—	—	39,104	$	4	$	126,651	$	(119,720)	$	(454)	$	6,481

Balance - December 31, 2018	6	5,377	27,253	$	3	$	118,062	$	(111,820)	$	(418)	$	5,827
Exercise of stock options, net of vesting of restricted shares	—	—	298	—		165		—		—		165
Vesting of restricted stock units	—	—	23	—		—		—		—		—
Exercise of common stock warrants for cash	—	—	617	—		6,184		—		—		6,184
Exercise of common stock warrants pursuant to cashless provisions	—	—	10,913	1		(1)		—		—		—
Series A convertible preferred stock redeemed for cash	(6)	(5,377)	—	—		(863)		—		—		(863)
Waiver of sponsor promissory note originally issued in conjunction with Reverse Merger and Recapitalization	—	—	—	—		1,993		—		—		1,993
Stock-based compensation expense	—	—	—	—		1,111		—		—		1,111
Cumulative-effect adjustment resulting from the adoption of ASU 2014-09 (Note 2)	—	—	—	—		—		1,087		—		1,087
Cumulative translation adjustment	—	—	—	—		—		—		(36)		(36)
Net loss	—	—	—	—		—		(8,987)		—		(8,987)
Balance - September 30, 2019	—	—	39,104	$	4	$	126,651	$	(119,720)	$	(454)	$	6,481

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	Preferred Stock			Common Stock						Additional Paid-in Capital		Accumulated Deficit		Other Comprehensive Loss	Total Stockholders’ Equity
	Shares	Amount	Shares	Amount
Balance - June 30, 2018	—	—	25,871	$	3	$	120,177	$	(104,709)	$	(374)	$	15,097
Exercise of stock options, net of vesting of restricted shares	—		22			11		—		—		11
Common stock issuance costs	—	—	—	—		(10)		—		—		(10)
Stock-based compensation expense	—	—	—	—		74		—		—		74
Cumulative translation adjustment	—	—	—	—		—		—		(16)		(16)
Net loss	—	—	—	—		—		(3,520)		—		(3,520)
Balance - September 30, 2018	—	—	25,893	$	3	$	120,252	$	(108,229)	$	(390)	$	11,636

Balance - December 31, 2017	—	—	24,559	$	3	$	110,265	$	(102,017)	$	(347)	$	7,904
Exercise of stock options, net of vesting of restricted shares	—	—	248	—		138		—		—		138
Issuance of common stock, net of issuance costs	—	—	1,086	—		9,564		—		—		9,564
Stock-based compensation expense	—	—	—	—		285		—		—		285
Cumulative translation adjustment	—	—	—	—		—		—		(43)		(43)
Net loss	—	—	—	—		—		(6,212)		—		(6,212)
Balance - September 30, 2018	—	—	25,893	$	3	$	120,252	$	(108,229)	$	(390)	$	11,636

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Phunware, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2019		2018
Operating activities
Net loss	$	(8,987)	$	(6,212)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	46		48
Loss on sale of digital currencies	4		21
Bad debt expense	79		135
Amortization of acquired intangibles	205		293
Change in fair value of warrants	—		54
Impairment of digital currencies	—		334
Stock-based compensation	1,111		285
Changes in operating assets and liabilities:
Accounts receivable	291		1,914
Prepaid expenses and other assets	(86)		166
Accounts payable	(327)		3,391
Accrued expenses	973		(6,322)
Warrant liability	—		450
Deferred revenue	792		(57)
Net cash used in operating activities	(5,899)		(5,500)
Investing activities
Proceeds received from sale of digital currencies	88		913
Payments for note receivable	—		(462)
Capital expenditures	(18)		—
Net cash provided by investing activities	70		451
Financing activities
Proceeds from convertible note	250		—
Proceeds from PhunCoin deposits	212		—
Net (repayments) proceeds from factoring agreement	(888)		255
Proceeds from common stock subscriptions, net of issuance costs	—		5,448
Proceeds from warrant exercises	6,092		—
Proceeds from exercise of options to purchase common stock	165		139
Series A convertible preferred stock redemptions and dividend payments	(6,240)		—
Deferred financing costs	—		(939)
Net cash (used in) provided by financing activities	(409)		4,903
Effect of exchange rate on cash and restricted cash	(38)		(40)
Net decrease in cash and restricted cash	(6,276)		(186)
Cash and restricted cash at the beginning of the period	6,344		308
Cash and restricted cash at the end of the period	$	68	$	122
Supplemental disclosure of cash flow information
Interest paid	$	510	$	534
Common stock issuances from subscription payable, net of fair value convertible stock warrants issued	$	—	$	9,604

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Phunware, Inc

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share information)

(unaudited)

1. The Company and Basis of Presentation

The Company

Phunware, Inc. (the “Company”) is a provider of Multiscreen as a Service (MaaS) solutions, an integrated customer engagement platform that enables organizations to develop customized, immersive, branded mobile applications. The Company sells its services in vertical markets, including health care, retail, hospitality, transportation, sports, and entertainment. The Company enables brands to engage, manage, and monetize their anytime-anywhere mobile users. The Company’s MaaS technology is available in software development kit form for organizations developing their own application, via customized development services, and prepackaged solutions. Through its integrated mobile advertising platform of publishers and developers, the Company also maximizes mobile monetization through an advertising product suite including real-time bidding, publisher mediation and yield optimization, cross-platform ad creation, and dynamic ad serving. Founded in 2009, the Company is a Delaware corporation headquartered in Austin, Texas.

Business Combination

On February 27, 2018, Phunware entered into an Agreement and Plan of Merger, as amended (collectively, the “Merger Agreement”) with Stellar Acquisition III, Inc. (“Stellar”). On December 26, 2018, the Company consummated the transaction contemplated by the Merger Agreement (the “Reverse Merger and Recapitalization”). In connection with the closing of the Reverse Merger and Recapitalization, the registrant changed its name from Stellar Acquisition III, Inc. to Phunware, Inc. (“Successor”). Furthermore, the holders of Phunware’s preferred stock converted all of their issued and outstanding shares of preferred stock into shares of Phunware common stock at a conversion ratio of one share of common stock for each share of preferred stock (the “Preferred Stock Exchange”). Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Reverse Merger and Recapitalization (the “Effective Time”): (i) all shares of Phunware common stock and preferred stock (the “Phunware Stock”) issued and outstanding immediately prior to the Effective Time (after giving effect to the Preferred Stock Exchange) converted into the right to receive the Stockholder Merger Consideration (as defined below); (ii) each outstanding warrant to acquire shares of Phunware Stock was cancelled, retired and terminated in exchange for the right to receive from the Successor a new warrant for shares of Successor common stock with its price and number of shares equitably adjusted based on the conversion of the shares of Phunware Stock into the Stockholder Merger Consideration, but with terms otherwise the same as the Phunware warrant (each, a “Replacement Warrant”); and (iii) each outstanding option to acquire Phunware Stock (whether vested or unvested) was assumed by the Successor and automatically converted into an option to acquire shares of Successor common stock, with its price and number of shares equitably adjusted based on the conversion of the shares of Phunware Stock into the Stockholder Merger Consideration (each, an “Assumed Option”). The shares of Successor common stock and the Transferred Sponsor Warrants (as defined in Amendment No. 5 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission ("SEC") on November 13, 2018) transferred to Phunware stockholders are collectively referred to as “Stockholder Merger Consideration”. The per share Merger Consideration paid to Phunware Stockholders was 0.459 shares of Successor stock for each share of Phunware Stock.

Unless otherwise noted, the financial statements, footnotes, and basic and dilutive net loss per share presented give retroactive effect of the Reverse Merger and Recapitalization.

Basis of Presentation

The condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) and include the Company’s accounts and those of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The balance sheet at December 31, 2018 was derived from the Company’s audited consolidated financial statements, but these interim condensed consolidated financial statements do not include all the annual disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2018, which are referenced herein. The accompanying interim condensed consolidated financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018, are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with the audited financial statements, pursuant to the rules and regulations of the SEC for

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interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to fairly state the Company’s financial position as of September 30, 2019 and the results of operations for the three and nine months ended September 30, 2019 and 2018, and cash flows for the nine months ended September 30, 2019 and 2018. The results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any future interim period.

Going Concern

Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going Concern (ASC 205-40) requires management to assess the Company’s ability to continue as a going concern for one year after the date the financial statements are issued. Under ASC 205-40, management has the responsibility to evaluate whether conditions and/or events raise substantial doubt about the Company’s ability to meet future financial obligations as they become due within one year after the date the financial statements are issued. As required by this standard, management’s evaluation shall initially not take into consideration the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued.

The Company has a history of operating losses and negative operating cash flows. Although the Company continues to focus on growing its revenues, it expects these trends to continue into the foreseeable future.

The Company’s assessment included the preparation of a detailed cash forecast that included all projected cash inflows and outflows. Future plans may include utilizing existing credit lines and/or obtaining new credit lines, expanding credit lines, issuing additional equity securities, including the exercise of warrants, issuing notes payable, convertible notes payable or other debt instruments and reducing overhead expenses. Despite a history of successfully implementing similar plans to alleviate the adverse financial conditions, these sources of working capital are not currently assured, and consequently do not sufficiently mitigate the risks and uncertainties disclosed above. There can be no assurance that the Company will be able to obtain additional funding on satisfactory terms or at all. In addition, no assurance can be given that any such financing, if obtained, will be adequate to meet the Company’s capital needs and support its growth. If additional funding cannot be obtained on a timely basis and on satisfactory terms, its operations would be materially negatively impacted. The Company has concluded there is substantial doubt about its ability to continue as a going concern through one year from the issuance date of these financial statements.

The accompanying condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.

2. Summary of Significant Accounting Policies

There have been no changes in significant accounting policies as described in our Annual Report on Form 10-K filed with the SEC on March 20, 2019 for the year ended December 31, 2018, other than those described below.

Changes in Accounting Policies

On January 1, 2019, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, as amended (“ASU 2014-09” or "ASC 606"), and have revised certain related accounting policies in connection with revenue recognition and deferred costs, as follows:

Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services in an amount that reflects the consideration we expect to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct, distinct within the context of the contract, and accounted for as separate performance obligations.

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus

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together may require significant judgment. Judgment is required to determine whether a software license is considered distinct and accounted for separately, or not distinct and accounted for together with the software support and services and recognized over time.

Platform Subscriptions and Services Revenue

The Company derives subscription revenue from software license fees, which comprise subscription fees from customers licensing the Company’s Software Development Kits (SDKs), which includes accessing the MaaS platform and/or MaaS platform data; application development service revenue from the development of customer applications, or apps, which are built and delivered to customers; and support fees. The Company’s contract terms generally range from 6 to 60 months.

Subscription revenue from SDK licenses gives the customer the right to access the Company’s MaaS platform. In accordance with ASC 606, a ‘right to access’ license is recognized over the license period.

Application development revenue is derived from development services around designing and building new applications or enhancing existing applications. The Company recognizes application development revenue upon the transfer of control of the completed application or application development services.

Support and maintenance revenue is comprised of support fees for customer applications, software updates, and technical support for application development services for a support term. Support revenue is recognized ratably over the support term.

When a customer contract consists of licensing, application development and support and maintenance, the Company considers these separate performance obligations, which would require an allocation of consideration.

From time to time, the Company also provides professional services by outsourcing employees to customers on a time and materials basis. Revenues from these arrangements are recognized as the services are performed. The Company bills professional service customers on the last day of the month in which the services are performed.

Application Transaction Revenue

The Company also generates revenue by charging advertisers to deliver advertisements (ads) to users of mobile connected devices. Depending on the specific terms of each advertising contract, the Company generally recognizes 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 the Company recognizes revenue at the time the user views, clicks, or otherwise acts on the ad. The Company sells ads through several offerings: cost per thousand impressions, on which advertisers are charged for each ad delivered to 1,000 consumers; cost per click, on which advertisers are charged for each ad clicked or touched on by a user; and cost per action, on which advertisers are charged each time a consumer takes a specified action, such as downloading an app. In addition, the Company generates application transaction revenue thru in-app purchases from an application on our platform.

In the normal course of business, the Company acts as an intermediary in executing transactions with third parties. The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the Company is acting as the principal or an agent in its transactions with advertisers. Control is a determining factor in assessing principal versus agent relation. The determination of whether the Company is acting as a principal or an agent in a transaction involves judgment and is based on an evaluation of the terms of each arrangement. ASC 606 provides indicators of when an entity controls specified goods or services and is therefore acting as a principal. Based on the indicators of control, the Company has determined that it is the principal in all advertising arrangements because it is responsible for fulfilling the promise to provide the specified advertisements to advertising agencies or companies; establishing the selling prices of the advertisements sold; and credit risk with its advertising traffic providers. Accordingly, the Company acts as the principal in all advertising arrangements and therefore reports revenue earned and costs incurred related to these transactions on a gross basis.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Items subject to the use of estimates include revenue recognition for contract completion, useful lives of long-lived assets including intangibles, valuation of intangible assets acquired in business combinations, reserves and certain accrued liabilities, determination of the provision for income taxes, and fair value of equity instruments.

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Loss per Common Share

Basic loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Restricted shares subject to repurchase provisions relating to early exercises under the Company’s 2009 Equity Incentive Plan were excluded from basic shares outstanding. Diluted earnings per share is computed by giving effect to all potential shares of common stock, including those related to the Company’s outstanding warrants and options, to the extent dilutive. For all periods presented, these shares were excluded from the calculation of diluted loss per share of common stock because their inclusion would have been anti-dilutive. As a result, diluted loss per common share is the same as basic loss per common share for those periods.

Fair Value of Financial Instruments

Authoritative guidance on fair value measurements defines fair value, establishes a consistent framework for measuring fair value, and expands disclosures for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 — Observable inputs such as quoted prices in active markets.

Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The carrying value of accounts receivable, prepaid expenses, other current assets, accounts payable, and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of those instruments.

Concentrations of Credit Risk

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable. Although the Company limits its exposure to credit loss by depositing its cash with established financial institutions that management believes have good credit ratings and represent minimal risk of loss of principal, its deposits, at times, may exceed federally insured limits. Collateral is not required for accounts receivable, and the Company believes the carrying value approximates fair value.

The following table sets forth the Company's concentration of revenue sources as a percentage of total net revenues.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Fox Networks Group	55	%	60	%	58	%	39	%
Fetch Media, Ltd.	—	%	—	%	—	%	26	%

The following table sets forth the Company's concentration of accounts receivable, net of specific allowances for doubtful accounts.


	September 30, 2019		December 31, 2018
Fox Networks Group	50	%	66	%
Parkview Health	10	%	—	%

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The Company completed its contractual obligations under its statement of work with Fox Networks Group ("Fox") as of September 30, 2019. While the underlying master services agreement with Fox (setting forth general terms and conditions) remains in place, the Company does not have any active statements of work with Fox.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all investments with a maturity of three months or less from the date of acquisition to be cash equivalents. The Company had no cash equivalents as of September 30, 2019 and December 31, 2018.

As a result of the Series A Financing (defined and discussed further below), the Company had $5,500 in restricted cash as of December 31, 2018. The Company did not have any restricted cash as of September 30, 2019.

Accounts Receivable and Reserves

Accounts receivable are presented net of allowances. The Company considers receivables past due based on the contractual payment terms. The Company makes judgments as to its ability to collect outstanding receivables and records a bad debt allowance for receivables when collection becomes doubtful. The allowances are based upon historical loss patterns, current and prior trends in its aged receivables, credit memo activity, and specific circumstances of individual receivable balances.

Accounts receivable consisted of the following:


	September 30, 2019		December 31, 2018
Accounts receivable	$	6,457	$	6,882
Less allowances for doubtful accounts	(3,216)		(3,276)
Balance	$	3,241	$	3,606

Allowance for doubtful accounts related to the Company’s litigation with Uber was $3,089 as of September 30, 2019 and December 31, 2018. (See Note 6 for more discussion on the Uber litigation.)

Long-Lived Assets

In accordance with authoritative guidance, the Company periodically re-evaluates the original assumptions and rationale utilized in the establishment of the carrying value and estimated lives of all of its long-lived assets, including property and equipment. The determinants used for this evaluation include management’s estimate of the asset’s ability to generate positive income from operations and positive cash flow in future periods as well as the strategic significance of the asset to the Company’s business objective. The Company did not recognize any impairment losses during the three and nine months ended September 30, 2019 or 2018, respectively.

Deferred Revenue

The Company’s deferred revenue balance consisted of the following:


	September 30, 2019		December 31, 2018
Current deferred revenue
Platform subscriptions and services revenue	$	3,076	$	1,506
Application transaction revenue	92		133
PhunCoin deposits	—		990
Total current deferred revenue	$	3,168	$	2,629

Non-current deferred revenue
Platform subscriptions and services revenue	$	4,167	$	5,622
Total non-current deferred revenue	$	4,167	$	5,622
Total deferred revenue	$	7,335	$	8,251

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Deferred revenue consists of customer billings or payments received in advance of the recognition of revenue under the arrangements with customers. The Company recognizes deferred revenue as revenue only when revenue recognition criteria are met. During the three months ended September 30, 2019, the Company recognized revenue of $1,321 that was included in its deferred revenue balance as of June 30, 2019. During the nine months ended September 30, 2019, the Company recognized revenue of $2,863 that was included in its deferred revenue balance as of December 31, 2018. Remaining performance obligations were $7,956 as of September 30, 2019, of which the Company expects to recognize 41% as revenue over the next 12 months and the reminder thereafter.

During the second quarter of 2019, Phunware announced the launch of a separate token, Phun, in addition to its current token, PhunCoin. As a result of this expanded dual token structure, the Company believes the economic substance and business characteristics of all previously issued PhunCoin Rights changed such that PhunCoin would be the investment vehicle in the Company's blockchain-enabled data exchange. As a result, the Company has reclassified all PhunCoin deposits from deferred revenue to a separate line item, "PhunCoin deposits," on its condensed consolidated balance sheet as of September 30, 2019.

Emerging Growth Company

Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.

Recently Adopted Accounting Policies

In May 2014, the FASB and the International Accounting Standards Board jointly issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which is a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current authoritative guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation.

The Company elected to take advantage of the extended transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards. As a result, we adopted the ASU and related guidance as of January 1, 2019 using the modified retrospective method.

The most significant impact of the standard relates to the elimination of the requirement to have vendor specific objective evidence, or VSOE, of fair value to separate and recognize revenue for products and services in a contract. The elimination of the VSOE requirement causes a significant change to the timing of revenue recognition for multiple-element arrangements with our MaaS subscriptions, application development services and related support and maintenance on the development services that lacked VSOE of fair value. Under ASC 606, we recognize the application development services at the time of delivery to our customer and recognize the license subscription and support services ratably over the term of the subscription agreements. Under the previous standards, we recognized all revenue from those arrangements ratably over the term of the subscription or support agreements. Due to the complexity of our revenue contracts, the actual revenue recognition treatment required under the new standard depends on contract-specific terms and in some instances may vary from recognition at the time of delivery. The timing of revenue recognized from professional services, support and maintenance and hardware remains substantially unchanged.

In addition, Accounting Standards Codification Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, or ASC 340, requires us to recognize an asset for the incremental costs of obtaining a contract with a customer if our sales incentive programs meet the requirements for capitalization. Previously we recorded these incremental costs of obtaining a contract as commission expense when we booked a sales transaction; whereas under ASC 340, we record an asset for the incremental cost to obtain a contract and recognize the cost over the period commensurate with revenue recognition.

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When implementing ASC 606, the Company applied the practical expedient to reflect the aggregate effect of all contracts that were not completed as of January 1, 2019 when identifying satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations.

The following table sets forth the cumulative impact of the adoption of the new revenue standard for select condensed consolidated balance sheet line items:


	Balance at December 31, 2018		Adjustments due to ASU 2014-09		Balance at January 1, 2019
Assets:
Prepaid expenses and other current assets	$	272	$	369	$	641
Liabilities:
Deferred revenue short-term	$	2,629	$	(465)	$	2,164
Deferred revenue long-term	$	5,622	$	(253)	$	5,369
Stockholders’ deficit:
Accumulated deficit	$	(111,820)	$	1,087	$	(110,733)

The following tables summarize the significant impacts of adopting ASC 606 on our financial statements as of and for the three and nine months ended September 30, 2019:

Condensed Consolidated Balance Sheet


	September 30, 2019
	As reported		Impact of Adoption		Balances Without Adoption of ASC 606
Assets:
Prepaid expenses and other current assets	$	637	$	(365)	$	272
Liabilities:
Deferred revenue short-term	$	3,168	$	218	$	3,386
Deferred revenue long-term	$	4,167	$	154	$	4,321
Stockholders’ deficit:
Accumulated deficit	$	(119,720)	$	(737)	$	(120,457)

Condensed Consolidated Statement of Operations


	Three Months Ended September 30, 2019
	As reported		Impact of Adoption		Amounts Without Adoption of ASC 606
Net revenue	$	5,637	$	55	$	5,692
Sales and marketing	$	705	$	(9)	$	696
Net loss	$	(2,426)	$	64	$	(2,362)
Net loss per share, basic and diluted	$	(0.06)	$	—	$	(0.06)

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	Nine Months Ended September 30, 2019
	As reported		Impact of Adoption		Amounts Without Adoption of ASC 606
Net revenue	$	16,462	$	346	$	16,808
Sales and marketing	$	2,094	$	(4)	$	2,090
Net loss	$	(8,987)	$	350	$	(8,637)
Net loss per share, basic and diluted	$	(0.25)	$	0.01	$	(0.24)

In connection with our adoption of ASC 606 on January 1, 2019, there was an increase to the Company’s deferred income tax liabilities and an offsetting reduction in the valuation allowance recorded against deferred tax assets. No income tax impact was recorded to retained earnings upon adoption as a result of the full valuation allowance on United States deferred tax assets. During the three and nine months ended September 30, 2019, there is no income tax expense or benefit recorded as a result of the adoption of the ASC 606.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18), which provides amendments to current guidance to address the classification and presentation of changes in restricted cash in the statement of cash flows. We adopted ASU 2016-18 effective January 1, 2019 on a retrospective basis. The adoption of this guidance changed the presentation of restricted cash on the Company’s condensed consolidated statement of cash flows for the nine months ended September 30, 2019. There was no impact to the Company’s condensed consolidated statement of cash flows for the nine months ended September 30, 2018.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,” amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule was effective on November 5, 2018. The Company adopted this disclosure beginning with its quarterly report on Form 10-Q for the quarter ended March 31, 2019.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Under current U.S. GAAP, the Company recognizes rent expense on a straight-line basis for all operating leases, taking into account fixed accelerations, as well as reasonably assured renewal periods. The accounting applied by a lessor is largely unchanged from that applied under previous generally accepted accounting principles. This ASU is effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Earlier application is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. As a result of this new standard, we expect to record a lease commitment liability and corresponding right-of-use asset for our leases designated as operating leases in Note 6, "Commitments and Contingencies" and Note 13, "Subsequent Events," upon adoption. The Company does not expect the new statement to materially impact our results of operations and does not plan on recasting prior periods.

In January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 provides a new framework for entities to determine whether a set of assets and activities (together referred to as “a set”) is a business. The amendments in the ASU will assist entities when they evaluate whether transactions should be accounted for as acquisitions (or disposals) either of businesses or of assets. This distinction is important since there are significant differences between the accounting for business combinations and the accounting for acquisitions of assets. Public business entities should apply the amendments to Topic 805 to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. As the Company is an

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emerging growth company, it has elected to defer implementation. The Company does not believe there will be a material impact to the consolidated financial statements upon adoption.

In January 2017, the FASB issued ASU 2017-04 Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step; comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Public business entities that are SEC filers should adopt the amendments in this ASU for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13—Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 improves the effectiveness of disclosures about fair value measurements required under ASC 820. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. The Company does not believe the adoption of ASU 2018-13 will have a material effect on our financial statements and their disclosures.

3. Reverse Merger

On February 27, 2018, Phunware entered into an Agreement and Plan of Merger, as amended (collectively, the “Merger Agreement”) with Stellar Acquisition III, Inc. (“Stellar”). On December 26, 2018, the Company consummated the transaction contemplated by the Merger Agreement (the “Reverse Merger and Recapitalization”). In connection with the closing of the Reverse Merger and Recapitalization, the registrant changed its name from Stellar Acquisition III, Inc. to Phunware, Inc. (“Successor”). Furthermore, the holders of Phunware’s preferred stock converted all of their issued and outstanding shares of preferred stock into shares of Phunware common stock at a conversion ratio of one share of common stock for each share of preferred stock (the “Preferred Stock Exchange”). Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Reverse Merger and Recapitalization (the “Effective Time”): (i) all shares of Phunware common stock and preferred stock (the “Phunware Stock”) issued and outstanding immediately prior to the Effective Time (after giving effect to the Preferred Stock Exchange) converted into the right to receive the Stockholder Merger Consideration (as defined below); (ii) each outstanding warrant to acquire shares of Phunware Stock was cancelled, retired and terminated in exchange for the right to receive from the Successor a new warrant for shares of Successor common stock with its price and number of shares equitably adjusted based on the conversion of the shares of Phunware Stock into the Stockholder Merger Consideration, but with terms otherwise the same as the Phunware warrant (each, a “Replacement Warrant”); and (iii) each outstanding option to acquire Phunware Stock (whether vested or unvested) was assumed by the Successor and automatically converted into an option to acquire shares of Successor common stock, with its price and number of shares equitably adjusted based on the conversion of the shares of Phunware Stock into the Stockholder Merger Consideration (each, an “Assumed Option”). The shares of Successor common stock and the Transferred Sponsor Warrants transferred to Phunware stockholders are collectively referred to as “Stockholder Merger Consideration”. The aggregate merger consideration paid pursuant to the Merger Agreement to Phunware stockholders amounted to approximately $301 million plus adjustments for cash on-hand as of the date of Closing. The merger consideration paid to Phunware stockholders was paid in the form of shares of Successor common stock. In addition, each holder of Phunware common and convertible preferred stock was entitled to elect to receive such holder’s pro rata share of up to an aggregate of 3,985,244 warrants (the “Transfer Sponsor Warrants”) to purchase shares of Successor common stock that were held by certain shareholders of Stellar. The Transfer Sponsor Warrants have the same terms as the Private Placement Warrants described in more detail in Note 9 below. The per share Merger Consideration paid to Phunware Stockholders was 0.459 shares of Successor stock for each share of Phunware Stock.

As consideration for the Transfer Sponsor Warrants transferred to Phunware shareholders, a promissory note was issued to the Sponsors (the “Transfer Sponsor Warrant Note”). The amount of the note was approximately $1,993, which represented $0.50