Phunware is a company that has largely posted losses. According to the Wall Street Journal , the company lost almost $26 million in 2017 and another $3 million during the first half of 2018. Nonetheless, the last couple of months have seen wild trading for PHUN.
PHUN rose from a long-running average of $10 per share at the end of December to a blip 52-week of $550 by the middle of January. The problem? Only 144,000 shares were actually trading. NASDAQ requires a minimum of 1 million publicly available shares, but this figure can include restricted shares. The majority of Phunware’s stock was not available for trading, meaning, much like Bitcoin, the actual liquidity of the symbol was very unclear to traders.
The spike to $550 was so quick it didn’t register on most candles, but NASDAQ and the Wall Street Journal both recorded the anomaly. PHUN closed at $157 on that day (January 10th.) The Austin-based company announced last June that it was planning to launch a digital currency , which is part of what fueled speculation about the company’s turnaround. Randall Crowder, COO of Phunware, said at the time:
We want to create the first fully compliant, gold-plated cryptocurrency that everyone else can point to. We welcome regulation (and) we welcome scrutiny.
Phunware is primarily a mobile app development firm. An anonymous former employee said in a 1-star review of the company that it “needs focus,” among other complaints.
The firm found its way to NASDAQ through a “blank check” acquisition. In such an acquisition, funds are raised with the intention of acquiring an existing company and taking it public. According to WSJ, NASDAQ is the favorite exchange for such listings.
Limited access to public shares creates an unrealistic per-share price. The dirty open secret of crypto trading is that many bitcoins are never traded . If every Bitcoin in existence were available on exchanges, it’s hard to know where the price would actually stand.
The effect is more extreme on the regular stock market, however. As demonstrated by PHUN and another company called Organogenesis Holdings Inc. (ORGO), limited share availability can lead to insane price swings. The WSJ says:
Organogenesis Holdings Inc., a developer of surgical and sports-medicine products, resumed trading Jan. 8 after merging with a SPAC late last year. The stock opened the following day at $15.60 a share and rose to an intraday high of $310.90 before closing at $82.35. Just 28,209 shares changed hands that day, according to FactSet.
Phunware filed to have an additional 21 million shares made publicly available on February 5th. The stock’s brief bubble appears to be over. At press time, it was trading under $100. CEO Alan Knitowski acknowledged the share imbalance as a driver in share price, saying:
If you have a supply-demand imbalance because all the other shares are locked up for six months and the warrants are un-exercisable, you can see these kinds of things happen.
An auditor concluded prior to PHUN’s acquisition that there was “substantial doubt” about its ability to remain solvent.
For its part, NASDAQ is moving to mitigate the problem by changing the rules. Soon, NASDAQ wants to dictate that restricted stocks not count toward the minimum shares required to list. The SEC has to approve that decision, which, being in the interest of the public, seems likely.
The whole incident brings to mind The Long Island Iced Tea rebrand during the blockchain hype cycle. Or even Riot Blockchain, a penny stock scam which benefited from its nomenclature.