Phunware, Inc.

Good afternoon, ladies and gentlemen. Welcome to Fundware's second quarter 2021 investor conference call. Currently, all participants are in a listen-only mode. Joining me today are Ellen S. Natowski, President, Chief Executive Officer and Co-Founder, Randall Crowder, Chief Operating Officer, and Matt Aune, Chief Financial Officer. The format today will include prepared remarks by Allen, Matt, and Randall, followed by a question and answer session. As a reminder, today's discussion will include forward-looking statements. These forward-looking statements, including any such statements referring to the potential effects or impact of the COVID-19 pandemic, reflect current views as of today and are based on various assumptions that are subject to risks and uncertainties disclosed in the risk factors section of our SEC filings. Actual results may differ materially and undue reliance should not be placed on them. Additionally, the matters being discussed today may include non-GAAP financial measures, reconciliation of GAAP to non-GAAP financial information is set forth in the earnings press release, which is available on the investor relations section of Fundware's website at investors.fundware.com. I further encourage you to visit investors.fundware.com to access not only the earnings press release, but also the current investor presentation, SEC filings, and additional collateral on Fundware. At this time, I would like to turn things over to Fundware CEO, Alan Natasky. Sir, please proceed.

Thank you very much, and welcome to our second quarter 2021 investor conference call. As a reminder, Funware is a 12-and-a-half-year-old enterprise software company focused on the intersection of mobile, cloud, and big data with business-to-business and business-to-government customers worldwide. Our mission is to provide everything you need to succeed on mobile by providing our customers with the product solutions, data, and services for their digital transformation needs on Apple iOS and Google Android devices and applications. Central to this effort is our enterprise cloud platform for mobile called MASS, or Multi-Screen as a Service, which is available for licensing under a SaaS business model over one to five-year contract periods worldwide. The completion of Q2 constitutes continued operational momentum for our business, as we have further accelerated our MASS platform vision and adoption across a number of key fronts, including new product introduction and indirect channel expansions. Not only have we formally rolled out our entire blockchain-enabled mobile loyalty ecosystem specific to fund token, fund coin, and fund wallet on a direct-to-consumer basis as promised, but we have also executed a brand new global multi-year distribution agreement with Carrier Global Corporation, a nearly $40 billion NYSE-listed anchor distribution partner for our indirect channels. First, revenues for each new initiative were achieved in Q2, and we expect to expand both dramatically rolling forward. First, more modestly here in Q3 and throughout Q4 sequentially, and then on a more accelerated basis throughout calendar year 2022 thereafter. To that end, and in parallel, we have seen a sequential increase in our total bookings and backlog quarter over quarter, which will be broken down in further detail by our CFO, Matt Aune in his section of the earnings broadcast. In terms of our current operating environment, our core customers have still not consistently returned to their offices and facilities and remain in a hybrid transition with regards to their employees and contractors safely returning back to work. We expect that cities, states, and countries will continue opening on a broader basis throughout the balance of 2021, while also understanding that this process will be an ongoing an unpredictable journey that won't happen overnight in light of the shifting myriad of government mandates tied to the ongoing pandemic. As suggested previously in past quarters, and again here, we are both excited and comforted by the dramatic increase in business activity across all aspects of our software product and solution offerings for mobile, big data, and the cloud. Importantly, this activity encompasses all three of our core growth engines rolling forward, including our mass cloud, our data-driven loyalty marketplace, and our secure blockchain-enabled token, coin, and wallet capabilities. This past year was the genesis of a transition in our company's history, as we shifted from a non-recurring, low-margin transaction business to a far stickier, more scalable, recurring, and high-margin SaaS licensing business for our mass platforms. In addition to continued enterprise and government interest in our mass digital front door solution for healthcare, our mass smart workplace solution for corporations, and our mass smart city solution for cities, we have resumed conversations with customers from sectors that were hit hard by the pandemic, including the hospitality and real estate verticals. In conjunction with growing our portfolio of direct customers, we intend to continue expanding our global footprint by amplifying our go-to-market strategy with indirect sales and channel partners, including not only Carrier Global as announced earlier, but three more signed but not yet announced partner contracts that we expect to release formally over the next few weeks. In parallel, we are excited about the completion of FundWallet and the launch of our blockchain ecosystem powered by FundCoin and FundToken. We are now live and excited to scale and monetize this part of our business and look forward to the accelerated global adoption of the blockchain-enabled mass customer data platform and mass mobile loyalty ecosystem commercially deployed. We are completely focused on the future and what a post-pandemic environment is going to look like for our business, while also recognizing and appreciating that the last year has represented a very interesting and unique challenge for all of us. While we saw a decline in recognized quarterly revenue associated with these initiatives when compared to the second quarter of 2020, We expect to see a rebound here in the balance of 2021. As always, we will continue our core go-to-market strategies centered on direct and indirect agreements and contracts with Fortune 500 customers, especially in the Fortune 100 size range, and governments ranging from local and county to state and federal. Importantly, and independent of the pandemic, We are extremely excited by a number of developments that have occurred over the past quarter and even more excited by what we see in the coming quarters ahead. First, we were able to launch three core customer and partner portals for scaling our business through indirect channels. These included a mass software repository on GitHub at www.github.com. A mass documentation repository at docs.funware.com. and a mass training and Funware Phenom certification repository at training.funware.com. Second, we were able to add to our mass bookings, backlog, and deferred revenue for future revenue recognition over one- to five-year contract periods that will ultimately provide SAS revenue recognition over the coming 12 to 60 months rolling forward. While these efforts do not provide instant or near-term gratification on revenue recognition for our P&L, They importantly demonstrate the ongoing health and expansion of our business and will be broken down in further detail by our CFO in his section of the earnings broadcast. As a reminder, and with our mass sales cycles typically representing two to four months on average, recent and pending customer wins will start appearing on our P&L in the coming reporting periods ahead. Third, we have expanded our install base of Funware IDs en masse to more than 15 billion devices worldwide including mass platform scalability capable of supporting up to 5 billion transactions per day, 500,000 transactions per second, and 1 billion unique devices per month. With more than one petabyte of data, typically growing at more than 5 terabytes per day, our mass platform now provides a robust customer data platform inclusive of both a detailed data ontology and a comprehensive knowledge graph for one-to-one interactions and engagements. And fourth, we commercially launched our FundWallet mobile applications on Apple iOS and Google Android in conjunction with our recently launched mass blockchain ecosystem, all powered by our FundCoin and FundToken cryptocurrencies. While FundCoin security tokens will appear on our balance sheet due to their status as a regulated security, FundToken utility tokens will actually flow transactionally through our P&L as net new and virtually 100% gross margin revenue. At this time, our CFO, Matt Aune, will go deeper into our second quarter 2021 financial performance as reported, including revenue and gross margin timing associated with a large public smart campus customer that affected our Q2 reporting, while also highlighting the dramatic improvements made to our balance sheet throughout 2021 year to date. Matt, please go ahead.

Thanks, Alan, and good afternoon, everyone. I'd like to thank you all for joining us today for a review of our second quarter 2021 financial performance and our progress on key strategic initiatives. For clarity, I'll be discussing GAAP financial measures unless otherwise specifically noted. Our press release, 8K, and website provide a reconciliation of all GAAP to non-GAAP financial results. Net revenues for the second quarter 2021 totaled $1.4 million. of which platform subscriptions and services revenue was $1.2 million. As I've mentioned previously, our focus continues to be on higher margin, longer-term software customers. In the second quarter, we recognized a new element to our financials, albeit small, as it just got off the ground. Fund token is included in our application transactions line on the face of our financials. With this added element, our net revenues derived from our mass platform subscriptions and services customers was 82%. Gross margin was 21.7% compared to 65.3% last year. On a non-GAAP adjusted basis, gross margin was 44.4% compared to 68.4% in the previous year. The main cause for the drop in gross margin was a mismatch of cost of goods sold on the revenues it is associated with. Our fulfillment team was diligently working on a large project that was originally scheduled for delivery in Q2, but pushed to Q3 by the customer. As you can see, this timing shift has negatively affected our margins in Q2 as we recognize the cost associated with the project, but have yet to recognize the revenue. We expect that gross margins for the quarter would have been closer to 65% on a non-GAAP basis if the customer's timeline did not slip to the third quarter. We did our part on time, but we aren't always the only dependency, which is a blessing and a curse. Multiple dependencies means we are sticky and build a lot of consensus to be implemented. Sometimes it means we have to wait on folks who aren't as operationally efficient as we have become. While I do expect our margins to fluctuate from time to time, a lower margin quarter generally means our bookings are strong and we are working to deliver on our backlog. I'd like to reiterate we continue to have a long-term goal of 75% plus gross margins. Total operating expense was $4.5 million, up from $4.4 million last year. Other non-cash operating expense items were stock-based compensation, and amortization of intangibles, making up $1.1 million this year compared to $1.1 million in the prior year. By excluding these one-time and non-cash charges, adjusted operating expense was $3.4 million compared to $3.3 million last year. Non-GAAP adjusted EBITDA loss was $2.7 million compared to $1.8 million last year. Net loss was $8.3 million, or 12 cents per share, compared to $3.5 million, or 8 cents per share, last year. Backlog and deferred revenue at the end of the quarter totaled $8 million, up from $7.7 million at the end of last quarter. I'm encouraged to see our backlog increasing. As I mentioned previously, we had expected Q1 to be the low point, with bookings picking back up for the remainder of the year. We closed the quarter with $2.7 million in cash on the balance sheet, along with 26 Bitcoin and 15.2 Ethereum. Subsequent to the closing of Q2, we raised approximately $2.9 million from our active upmarket ATM offering with B Rally Securities. The debt that is remaining totals $3.9 million, which is comprised of our $2.9 million PPP loan, which we have applied for forgiveness from the SBA and are awaiting a response, and $1 million of promissory and convertible notes that come due in 2024. Looking at our current capital structure, needs, and strategy going forward, I believe that we are well positioned operationally. As previously mentioned, we expect our debt load to drop to $1 million by the end of the third quarter, assuming we receive forgiveness on our PPP loan. If we look beyond just debt, you will see that we have made significant progress reducing our current liabilities by over $10 million in the first six months of the year. We have roughly $22 million open on our $25 million ATM offering, giving us operational flexibility to access cash for the capital markets if we choose to do so. While we have used the ATM sparingly over the past few months, we continue to be very mindful of dilution at lower stock prices and have only taken what we feel we need. Finally, we have available approximately 50 million of open shelf space on our $100 million registration statement we filed in February of this year, providing simplicity and optionality for any future capital needs to support both organic and inorganic growth opportunities. In closing, I said previously the transformation the company has gone through over the past 12 months in the face of the COVID-19 pandemic has been remarkable. We have worked hard to improve our balance sheet and give ourselves flexibility to raise additional cash as needed to execute against our short-term and long-term objectives. We have continued to operate the company extremely efficient and have been able to make several key hires in sales and engineering without increasing non-GAAP operating expenses quarter over quarter. As Randall will discuss, we are excited to see the progress we are making building the pipeline in the second half of the year with both customers and partners. The COVID-19 pandemic will likely continue to impact the time to close new deals and the revenue recognition of these deals through the end of the year, but we believe that we are past the worst of it and will start seeing more consistent growth as we head into the second half of 2021. We will continue to be active with financial conferences and investor meetings throughout 2021 in our efforts to tell our story and further strengthen our corporate profile in the capital markets. The next conferences we will be attending will be the 10th Annual Gateway Investor Conference on September 8th and 9th, and the 23rd Annual HC Wainwright Global Investment Conference on September 13th through the 15th. And we'll look forward to augment the number of conversations and meetings with high-class institutional investors. With that, I'd like to turn over the call to Randall.

Thanks, Matt. During our last earnings call, I discussed our competitive landscape, so today I want to highlight our go-to-market strategy so shareholders can better assess the progress we're making and account for the challenges we face. It's important to remember that we have only been actively selling our SaaS-inspired mobile platform for the past 18 months once we scaled down the last of our digital agency business tied to Fox's mobile application portfolio. When we decided to make this pivot from lower margin, non-recurring digital agency revenue to higher margin, recurring SaaS revenue, we knew it would be a process to not only upgrade mass, but also educate the market on what is now possible. Now, brands can finally license mobile software in much the same way they can license a customer relationship management solution from Salesforce or a cloud-based communications platform from Twilio. And while we couldn't have foreseen the pandemic, our go-to-market strategy remains relatively the same. We are targeting industries that have been slower to adopt mobile solutions such as healthcare, politics, hospitality, and property management to include both residential and commercial. Organizations in these industries have to manage complex customer journeys, but have come to understand that leveraging the power of a mobile device is the only way to accomplish this economically. Mass allows their customers to navigate these experiences contextually based on who they are, where they are, and what's most important to them so that brands can not only delight their customers but also drive profitable behavior. While our solution is sticky, it remains a complex sell because of its transformational nature. Our typical sales cycle, which we find ranges from three to 12 months, has six major components, identify, prospect, qualify, propose, close, and of course upsell. I'm emboldened by our pipeline and the number of proposals customers have requested, which bodes well for Booking's growth in the second half of the year. However, when we close a deal, the majority of the total contract value is made up of a software license, so we'll recognize that revenue over the lifetime of the contract, which is often three to five years. Therefore, an important metric for us as we begin to scale will be our customer announcements. Despite the pandemic, we were thrilled to announce that our mass smart hospitality solution is being deployed at a leading international luxury resort. This is a prime example of how our mobile software can tech enable a complex customer experience. From navigating the resort, to calling the valet, to ordering drinks directly from your phone so you don't have to wait at the bar, to even using your phone to access your room so you no longer need a key card, Our solution allows any hospitality brand to turn a mobile device into a 24-7 mobile concierge that ensures a seamless experience for every guest. Of course, the luxury resort experience is not that dissimilar to the experience a resident may have in a luxury high-rise or mixed-use development. We continue to see a lot of interest in our mass smart residential solution as well, which was licensed this quarter by Regent Square in Houston, Texas. Perhaps nowhere is a seamless experience more important than in healthcare, which remains one of our most promising industry verticals. We were honored that our mass digital front door was selected by yet another health system, this time by one of the largest and most comprehensive pediatric healthcare systems in the country. Our healthcare solution helps patients, clinicians, and even visitors demystify the continuum of care by ensuring everyone has access to the right information at the right time, in the right place. However, to scale more quickly, we have been focused on building out our indirect channel strategy. So the most important metric to track may just be our partnership announcements. As Alan already highlighted, Carrier has licensed our proprietary mass location-based services software and integrated it into their Blue Diamond mobile application as they expand their solution to promote smart, sustainable, healthy buildings. This is a great example of how key features of mass can be licensed and integrated into existing third party solutions and fun work and benefit from a much larger companies brand equity sales force and distribution network. Alternatively, indirect channel partners can also opt to license entire solutions from us and we're excited to announce in the coming weeks, several of these that we've already been executed. We expect these indirect channels to activate over the remainder of the year and meaningfully contribute to our growth in 2022 while helping permeate our software across industries that can leverage mass to drive their digital transformation initiatives. In a world where many of the products you buy have become Amazon-enabled, we are well-positioned to ensure many of your experiences in the future are funware-enabled. Now I'd like to turn things back over to Alan for closing remarks. to address two additional levers we are looking to pull to drive growth, inorganic opportunities and our mass blockchain ecosystem managed by FundWallet and powered by FundCoin and FundToken.

Thanks, Randall. As highlighted throughout today's call, we are all extremely excited by the recent commercial launch of our mass blockchain ecosystem. What it means to me is that our decade-plus of mass platform building across mobile, cloud, and big data accompanied by our years of community engagement in blockchain and cryptocurrencies, have resulted in the culmination and convergence of massive global addressable markets and trends that can now act as strong wind at our backs to reaccelerate our growth. Not only have we successfully achieved our first revenue from this launch, but we also expect this part of our business to scale materially in the quarters ahead. We expect this ecosystem to complement and supplement our core mass offerings as we offer our enterprise customers additional capabilities to identify and engage their target audiences. While many corporations and individuals are newly familiar with blockchain and cryptocurrencies, both Funware and our executives have a long and distinguished history within the global digital asset community. As such, we expect to be a trusted bridge for Fortune 500 corporations and governments looking to leverage blockchain. Please look for additional announcements in the coming weeks and months ahead as we enable consumers to not only regain control of their data with FundCoin, but also to reward them for their engagement with FundToken, which can be purchased online with US dollars, Bitcoin, and Ethereum at buy.fundtoken.com. In parallel, And as we would again reiterate here, we intend to complement and supplement our core organic growth activities through direct and indirect channels worldwide with opportunistic inorganic mergers and acquisitions. Importantly, we expect to focus our merger and acquisition activity on targets that are operating profitably and would represent accretive deals in areas that will provide more customers, more partnerships, and more distribution for our mass platforms. especially in international markets including Europe, Asia, and South America. To that end, we have recently signed a fully executed letter of intent to acquire a company here in the United States that will accelerate our new direct-to-consumer go-to-market channel for FundWallet, FundToken, and FundCoin, and will provide a much more detailed breakdown of the deal when we have formally executed the definitive agreements underlying the transaction. If successful, we would expect the transaction to add upwards of $1 million per month in profitable transaction revenues to our core mass software licensing and services. Finally, and importantly rolling forward, we fully expect to maintain a laser focus on our core operating and financial model, which includes top line growth of 30% or more year over year and blended gross margins of 75% or greater. With that, and in conjunction with a sincere thank you for your ongoing interest and support in all of our activities on behalf of the entire FundWare family worldwide, I would like to now open the call for questions through the operator. Operator, go ahead, please.

Ladies and gentlemen, the floor is now open for questions. If you do have a question or comment, please press star then 1 on your telephone keypad at this time to join the queue. If you're using a handset, please pick up your, if you're using a desk phone, please pick up your handset to provide the best sound quality. Again, ladies and gentlemen, that is star one to signal for a question. And we go first to the line of Darren Astahi from Roth Capital Partners. Please go ahead.

Hi, guys. Good afternoon. Thanks for taking my questions. First on carrier, I know you guys announced that early June. I'm just kind of curious how the needle has moved on the backlog with that partnership or any kind of color you can share in terms of, you know, what visibility might look like into the third and fourth quarter.

Yeah, great. This is Alan. Thanks for the question. I think that what we found in Q2 that we spent our time on with that was basically doing three core things. One was to get all the procurement systems that they have to operate their order system along with marketing packages that include our software in part of their enterprise smart campus solution. The second thing that we needed to do was to actually then do a train-the-trainer session that went across all of the primes for Carrier to be able to deal with how the deployments would go out, how the applications would be activated, and then all the methodologies that they would use for how they would interface both the maps and a lot of what we call fingerprinting, which is to enable all the location services within. And then the third bucket was the business planning and strategy part of how they're going out to market, importantly of 100,000 customers globally in that install base, where we're effectively an upsell or a cross-sell to activate all the hardware from Carrier that's being purchased across their access systems, security systems, elevator, escalator, and then heating air conditioning that then deploy the software to activate things. So Q2 to us was about completing all of that work that we had to do to activate and get the very first revenue, which were predominantly specific to carrier facilities. And then here in Q3, what we're doing is getting the go-to-market packages ramped and spiked through their global sales teams so that they're now fully engaged They kicked that effort off with a public webinar, which has been completed, and their next steps through this period is to actually start scaling that and rolling that out. I think in Matt's section where he talked about our expectations that the initial revenues of Q2 would start ramping in Q3, Q4, and we haven't given out any specific guidance as to their expectations of the adoption rates and timing. But when we have more information available on that, we'll provide it as we go.

That's helpful. Thanks, Al. That's another one. Obviously, COVID is a tough thing to navigate. So as the Delta variant kind of reared its ugly head, I know there's some areas like corporate campuses where people talked about going back to work and maybe kind of pull the reins back. I mean, have you seen any movement in terms of conversations with maybe the corporate side where maybe that's become a little bit of a headwind and then maybe the inverse in your healthcare practice and vertical, like have you seen more accelerated conversations as a result of Delta?

Yeah, let me kick this one off and then I'm going to hand over to both Randall and Matt. As all three of us are seeing different parts of this, I will say as a backdrop, It's real interesting, right? Like COVID is happening. The pandemic surely hasn't gone away. Our original expectation is okay when there's a vaccine. By the end of the second quarter, those that want to take it will have, you know, used some kind of informed consent, decided to take it. It was for them. In other cases, people decided not to. What I think none of us really expected with the concept of Delta as a variant was is all the noise that now has kicked off in Q3 as we're kind of gearing up for everyone going back to school, whether it's K through 12, colleges or universities. You're now getting almost like a political division by states, cities, counties. You even have city leadership battling county or state leadership. And this is spilling over publicly everywhere. When we take a step back and we think about our personal lives, What we actually see is people don't really change any behavior tied to COVID. They stay home if they want to stay home, if they want to go to a bar or a restaurant, they want to go to live events, they want to travel, they want to go have fun. Most everyone seems to be making their own decisions, understanding that COVID isn't going away any more than the flu is going away, and they're making their own decisions for themselves and their families, and they're just going about their lives. When you suddenly say business, then you get in this very different construct. Matt mentioned as part of his session where we had one of our corporate campus customers that we did all the work to go do the deployment. They were delayed getting into their new headquarter facility in Atlanta, Georgia. And as a result, we had this timing issue as to where that revenue gets recognized and how that looks on margins due to some of this noise of COVID. The reality is when you're in the business world, a lot of times you might be better off hearing people say, like, hey, I just don't want to go to work in the office because of the commute. That would make a lot of sense, probably pretty intellectually honest. When people suddenly say I'm worried about COVID going back to the office, I don't know that I really believe that has anything to do with the office other than, hey, I enjoy working remote. I found a way to do it. I don't want to be stuck on traffic. And, hey, so COVID is my stay at home. But we definitely have seen corporate campuses from San Francisco to Atlanta to other cities and venues where they're just not activating their employee base to go back to their facilities. They're either delaying it or they are still waiting to finalize what decisions are going to look like. So I think there's going to be a bit of a disconnect between what we see personally and what we see business-wise And I think it's going to just be a process that we're all going to go through. And I expect you're going to see it's not going to be like every vertical is going to operate the same. I think it's going to be literally like each city, county, and state are making their own decisions. And then depending on the leadership by state and the directives coming from the federal government, you're just seeing different camps behaving in different ways. So we definitely feel like the next quarter is going to look better than this quarter that we're announcing. We expect that to continue through Q4. And the only real thing that's dramatically different is I think there's like this six months of unknown that continues where how the businesses are going to operate and when people are going to be back. I was going to have Randall kind of walk through specifically some of our healthcare customers versus our real estate hospitality customers versus some of the smart city government-oriented groups, just to give that flavor. And if Matt wants to make any more comments about the enterprise customer and sort of their delays impacting what we recognize, I'm happy to do that. Randall?

Yeah, thanks. I won't go too much in. I mean, I think you covered it. So I want to leave some room for some additional questions. I mean, the reality is, you know, the industry that you think, you know, will kind of be a little bit slower to, you know, kind of get over the COVID hangover are obvious like workplace. But, you know, we've always said we're industry agnostic. So, you know, our healthcare vertical is wildly active. And, you know, you have HIMSS right now going on in Vegas and, I would have thought they might even cancel it, but they didn't. And so a lot of great partner activity going on there, a lot of activating these kind of indirect channels, and a lot of really exciting announcements for us going forward. healthcare is going to continue to really need technologies like ours to kind of demystify that continuum of care, but also just manage patients, manage people coming in for elective surgeries. You can't go to a hospital right now without right now filling out paperwork and doing all these COVID onboarding forms. And so there's a lot of this that can be taken over by mobile software and done more effectively. And so a lot of hospitals are are really embracing that. You can look at Virginia Hospital Center. If you go, anyone on this call that's in Virginia, stop by that hospital. You'll see signage everywhere for their mobile application. They mailed out 100,000 pamphlets to people. This is becoming a competitive edge. We talked to, one of the most interesting conversations we've had with healthcare is now actually looking at our app transactions business. How do I do what we call geoconquesting? How do I target customers? you know, patients who maybe are at a competing, you know, health systems ER and actually tell them, if you come to our ER right now, you won't have to wait. That's a really different way of approaching healthcare that they've never had to do before. But, you know, COVID's accelerated that, you know, what's your ROI? What's your revenue? What's your plan? You know, these smaller hospitals are struggling and the larger hospitals are looking at for every competitive advantage and we represent that. And so, Again, I always say it, we live in a mobile-first world. It's quickly becoming mobile-only. Healthcare is really becoming aggressive when it comes to kind of digital transformation. And then residential, mixed-use development, all of these are really insulated from COVID. People are working from home, so what we can do for a luxury high-rise residential building is, you know, that's what we did with Regent Square, for example. And so, you know, these things I think are going to, you know, take time to get right back to steady state. Workplace is probably the one that we, you know, are really excited about, especially with what we're doing for Norfolk Southern, being able to do that for, you know, a lot of companies. But I think people would be foolish to think that everyone's just going to abandon their offices, you know, have My dear friend that started ClickUp in San Diego, and they just opened their brand-new office overlooking the baseball stadium. And we've got 100 people in there, and they're all ready to go. So, you know, it'll be a mixed bag. We've got a lot of interest, a lot of activity. But I think, you know, we'll see that begin to grow in the second half of the year. And then 2022, I think, is where, you know, we'll see things kind of begin to return to steady state based on what we're seeing in our pipeline.

Great. Thanks, guys.

Next, we go to the line of Howard Halpern with Taglich Brothers. Please go ahead.

Good afternoon, guys. In terms of the delay that occurred or slippage in the project, has that occurred yet in this quarter, or are you just expected that the customer will come through and you'll have the deployment done in Q3?

Yeah, I mean, I can talk just in terms of the accounting aspects, and perhaps Randall can add a little more color on the actual project. But from Mark's perspective, like I said on the call, the work has been done on the project. It's just a matter of getting it delivered to the customers. It's no fault of our own, as we discussed, for various reasons. We're not able to deliver, and, you know, under gap recognition, we've obviously had to deliver the product to the customer to start recognizing the revenue. We've taken the expense above the line to, you know, get the project out to them, and so it's just a mismatching. But, you know, in terms of when it will be delivered, we anticipate that it's going to be delivered this quarter, Q3. Okay. We should –

all things being equal, should provide the opportunity for a little bit of an outsized gross margin?

You know, it kind of remains to be seen. I mean, we're still, you know, obviously we're still here early in the quarter. We've got some other projects we're working on, you know, This particular customer isn't the only one where we're experiencing some of these things. You know, it's obviously, you know, it's not just one customer. COVID impacts a lot of our customers, potential customers. There's other things where we may see this impact go across to some different customers, and we could have some delays from Q3 to Q4. So we'll see. You know, on the surface, yeah, there could be some opportunity there, but we still have to kind of work through that and see what we're going to be able to get delivered and what customers are in their offices and ready to go.

Okay. And, you know, with all the different, you know – mandates, regulations, and especially from just self-imposed, I guess, in the corporate level, especially in hospitality, at least in the New York, New York City area with restaurants and such. Are you seeing any activity there? And are those the type of customers long-term that if you were able to get you'll be for the mass, uh, for your mass product that you'll be able to transition them to the, uh, fund coin loyalty programs over time.

Yeah. So a couple of things in there I'll take. So the first thing is, uh, we are, uh, no more or less confident than probably you or anybody else as it relates to what will individual cities or counties or states do, when will they do it, when will they open, then for every step forward, two steps back. I think we're all living through this daily. That gets really noisy for the Fortune 500, obviously the companies we're dealing with, because even across their large-scale operations, you know, Carrier is a $40 billion company, but they have facilities and offices in tons of different jurisdictions domestically and abroad. And so the concept of one size fits all or what they're going to do in New York at their facility and headquarters in Rochester, to your point about New York, they behave one way there and different when they're down in their, you know, offices in South Florida where their innovation center is located and where they bring customers and partners to show off all the amazing products that they have, including that which includes our software. So I think that each of these are going to have their ebbs and flows. And to your point, Sometimes we're going to see where that delay would lead to an expansion of margin. That operates under the assumption that you don't have other customers that get caught in the same problem where they can't get back to their office. As it relates to what we really refer to as a mass mobile loyalty and reward system, the concept of how you get rewarded for your personal information and data instead of being harvested and exploited the way you would with Google and Facebook and Twitter and all the others where we are the product, and then the ability to reward people for their physical activity, actions, and behavior, we believe that that is going to be a very compelling thing that people are going to take more ownership of their identity, their digital identity, their personal sovereignty. And the good news is, is we're alive. We're alive with the system. We're starting to do that rollout. We're starting the early adoption. And what we've done is we've packaged, and I'll let Randall kind of talk through, we've packaged this as software development kits within MAS so that our customers who already work with us can very easily grab an SDK drop it into their applications, and suddenly they have the equivalent of a white label loyalty and rewards card. But, Randall, why don't you give a little bit more insight on the rollout and the methodologies of the business customers versus the consumer side of it?

Yeah, again, I'll go quick. I think we covered this in the earnings call. You know, the best thing to think about is, you know, we announced it, right? You know, so we haven't announced the name yet, but one of the largest and most kind of complex international luxury resorts, that's our target. And these folks have five 10-year plans. You know, when they're talking digital transformation, they're not wrestling with, you know, what are we going to do with COVID, you know, next month? And so we've never gone after kind of the restaurant industry. And the reason being is most of them have no intention or budget to afford a complex mobile application portfolio. But therein lies the opportunity of what we're doing with FundWallet. We have all of our applications pre-integrated with all of our products. And that's all of the features, analytics, content management. We have the ability to turn on that location-based services layer. And so as we begin to roll this first kind of consumer-facing application and ecosystem out, we do anticipate being able to offer some of these smaller and medium-sized businesses, an ability to piggyback on that mobile application portfolio. So just because you don't have your own native mobile application like a leading luxury resort that can afford it doesn't mean you can't get some of the features of consumer engagement through fund wallets by having kind of a branded interaction within FundWallet, which we do through carding and other sorts of prompts for engagement. And so that's going to be exciting. That's the whole reason why we're building that. It expands our universe and also begins to continue to look like SaaS for some folks who maybe can't afford a full deployment. So we can kind of serve all. So expect that to come. That's the chicken or the egg. We're focusing on user growth first. So you'll see in some upcoming releases, a lot of the kind of product enhancements are built around viral mechanics. And so once you kind of have that audience growing, that becomes more compelling to brands, but then allows them to kind of use that feature set. So for us, when it comes to where we sell B2B, again, that's going to be very large resorts, very large hotel systems. And again, all of this, I can't underscore this enough, We are not building a direct-to-business company here. We spent the majority of the last 12 months, 18 months, not chasing revenue. I know everybody wants to see the revenue just go through the roof and grow. We could do that, and we could be a nice, strong micro-cap company, but if we want to be a Fortune 500 company, We need to be able to sell through indirect channels. And so activating these channels, you know, we knew we wouldn't make everybody happy in terms of revenue, but long-term, you know, being able to sell, you know, through channels like Carrier, through channels like some of the ones we're going to announce here shortly, that's how we really grow this company, and that's what people should be looking at, not just these individual customer wins.

Okay. Well, thanks, and keep up the good work, guys. Thanks, Howard.

Again, ladies and gentlemen, if you do have a question or comment, please press star then one to signal. And next, we go to Scott Buck with HC Wainwright. Please go ahead.

Hi. Good afternoon, guys. Thanks for taking my questions. First, I want to apologize. I've been kind of jumping back between calls. So, if you've answered these, again, I'm sorry. First, I'm curious if there are any kind of one-time fees associated with the launch of fund wallet, fund coin, fund token that we should be thinking about from a modeling perspective for future quarters?

Hey Scott, it's Matt. No, nothing of significance in terms of any one-time fees.

Okay, perfect. And then on gross margin, I understand the mismatch in the quarter. But I would assume that would mean that the third quarter would be kind of mismatched the other direction. Is that the right way to think about it?

Yeah, so Howard did ask this question, so you can go back and get a little more detailed. I think right now we're looking at that, and we'll see. Obviously, we're only halfway through the quarter here. There's a potential that could happen. I think the only other thing I would say is that that customer that pushed from Q2 to Q3 is not the only customer of ours that is experiencing issues with getting back to work or getting back to the office. And so, you know, there could be other similar issues that are just going to take a little while to right size. So, you know, while we do anticipate we're going to deliver this quarter and we'll be able to recognize that above the line, I'm sorry, above the line and margin will be higher. You know, there are some other customers that, you know, could push out to Q4 and impact it. So it just kind of remains to be seen.

Yeah, no, that makes a ton of sense. And then last one for me, Just on, excuse me, lost my place. Additional effects, I mean, any kind of further investment, headcount ads or anything like that you're thinking about for the remainder of the year?

I'll help with that one. For the most part, all of our focus is on sales and marketing add-ons and then some engineering projects. As we're, you know, starting to get more bookings, we had a little bit of an uptick, obviously, in backlog, and we didn't get to recognize those revenues. But the real help of our business is in closing deals, getting the bookings, expanding the backlog. It doesn't affect our ability to invoice, get paid annually, prepaid in advance on net 30. But obviously, it takes a while to flow through 12 to 60 months of revenue recognition. associated with that. So I expect that that will kind of be a consistent thread as we go forward. And that's really where we're trying to get people to focus on that, because the gap score keeping will kind of follow how the gap score keeping is. And we're going to be successful by scaling Carrier, scaling the other channels that we've signed, but we haven't quite yet announced. But that'll be coming over the next few weeks. and continuing things forward from there.

So that's great, guys. Again, I appreciate the time this afternoon. No problem at all.

Next we go to the line of Ed Wu with Ascendant Capital. Please go ahead.

Yeah, thanks for answering my question. In terms of, you know, as things are slowly returning back to normal, do you think that there's going to be a big improvement in your sales cycle?

Well, we do think there's a lot of pent-up demand and there's pent-up budget that wasn't spent. I think the real chicken and the egg that, you know, Matt's alluded to in his comments, Randall has alluded to, and I've done the same, that the real thing is the unpredictability of when folks are going to get back to the office. As we said, all the personal lives are operating one way and how to deal with school and when we go out and travel and do the things we do. Corporations seem to be taking a much more measured and deliberate approach, which in many respects makes a lot of sense. Auditability, contact tracing, and other things. Should we get spikes in different parts of the U.S.? But I do think that our focus is on continuing to sign deals, get those folks up to speed and trained in the channel, and then allowing their sales teams globally as they're coming back on board to start ramping. And as Randall said, we weren't quite sure what was going to happen with HIMSS on the healthcare-specific conference in Vegas. We kind of were flipping a coin as maybe they're going to cancel it, maybe they're not. We were excited that they did not cancel it. We've had a really productive week with our team that's out there dealing with digital front doors and the healthcare vertical. Obviously, we see a bunch of needs and If there's a good side of looking at the optimistic part of what happened in the pandemic as it relates to our business, it's that digital transformation is not likely to be an 8 to 10-year process. I think we're going to see an acceleration of the adoption of mobile technologies, and that is going to be met with more meaningful budgets that largely have been tabled over the last 18 months while we've all been dealing with this new challenge. So we're looking forward to helping corporations understand this digital transformation, how to apply it, how to systematize it and deploy it. And as we come out of the other side of this, which hopefully will happen before we finish out this year, then we can allow people to take that demand, this budget, and those needs and really start scaling it around to their customers as well.

Great. Well, thanks for answering my questions, and I wish you guys good luck.

Thank you. Appreciate it.

This concludes our question and answer session. We now turn to Alan Natowski for closing remarks.

Yeah, just in closing remarks, I'd like to say that we do appreciate the patient support of our investor base. We do appreciate all the work and detail that our analyst community has been diving into and learning more about the fundware story. how digital transformation is going to be paramount to the Fortune 500 and also to governments. And really, we appreciate the patience that also goes alongside of really the unknowns that all of us are dealing with, both professionally and personally. We know it's been a huge burden on families, employees, and people that we operate and do business with around the world. I think we'd all like to be done with this permanently and move on. As I said, I do think, much like the flu, COVID is going to be with us for quite some time, and we're going to have to all adjust to it. We're going to do that as safely and responsibly as we can. And we are looking forward that there will be another side to this, and we will continue to scale out. We're going to scale and be successful because these channel partnerships that we're signing and that we'll be announcing more of over the couple of weeks coming up, will actually be really meaningful to our expansion and growth. And we're also excited now to be fully live with everything we're doing with blockchain, loyalty, rewards, fund coin, fund token. And now instead of just talking about it, we can execute and scale. Important in anything that you do as a new initiative is obviously to get the first products out and then get the first revenues and then start scaling them. And we're very excited that we managed to get that done on two core initiatives that we had, as we said, last earnings call that we were going to do. We got those done. And now we look forward to sharing the rest going forward. So thank you very much. And we look forward to talking to you all again on Q3 here in a few months.

This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.