Phunware, Inc.

Good afternoon, ladies and gentlemen, and welcome to Fundware's fourth quarter and full year 2022 Investor Conference Call. Currently, all participants are in a listen-only mode. Joining me today are Russell Bice, Chief Executive Officer, Randall Crowder, Chief Operating Officer, and Matt O'Neill, Chief Financial Officer. The format today will include prepared remarks by Russ, 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 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. 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 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 FUNWARE. At this time, I would like to turn things over to FUNWARE's CEO, Russell Bice. Sir, please proceed.

Thank you very much, and welcome to our fourth quarter and full year 2022 investor call, my first as FUNWARE's CEO. FUNWARE has been on my radar for quite some time, as I admired the company going back a decade when I was COO at Mutual Mobile. This organization has always been known for its great talent, top customer brands, and its great work. As the company recently transitioned its business model from custom app development to a SaaS product model, it's at the stage where I can be the most effective in elevating our corporate trajectory to the next tier with my product orientation and operational focus. I won't steal Matt's thunder by going through the 2022 numbers, so I'll talk about where we are and where we're going in 2023. To start off, it's safe to say we're still in the early stages of enterprises adopting solutions to drive contextual engagement as they wrestle with digital transformation strategies. Fundware sits at the cross-section of three important markets to help them. First, the $187 billion mobile application market that is fairly mature but still growing at a 13.4% CAGR. The $28 billion location-based services, LBS market, is growing at a 23.5% CAGR as technology improvements have helped customers finally realize its true promise. This is a nascent industry that remains in the early innings due to two tough years of the pandemic, the gradual unlocking afterward, and then the economic uncertainty that arose during the past year. The third market is often referred to as integration platform as a service, IPaaS, But at $3.7 billion and a 30% CAGR, it's becoming increasingly important as companies demand interoperability from disparate third-party systems. Although the pandemic delayed our market penetration, we have a robust product with immense upside potential, which is one of the key reasons I was drawn to Leading Fundware as its new CEO. Our SaaS products enhance the user experience by providing consumer-grade, state-of-the-art mapping and wayfinding and mobile engagement to help brands reach customers where they are when they are most willing to engage in profitable behavior. This could be an opportunity to spend money or it may be an opportunity to take advantage of self-service tools that can significantly reduce operational costs. We're enhancing those products to provide more capabilities to consumers while creating revenue uplift and extending the reach of brands to improve the total experience. In particular, these provide a strong ROI to customers in the hospitality and healthcare verticals, with Lighthouse brands guiding the way. And beyond those verticals, we have convention centers, smart workplaces, multi-dwelling units , sporting events, retail, entertainment, and more that all struggle to manage complex user journeys while still delivering best-in-class consumer engagement. For our go-to-market strategy, we're strengthening our marketing efforts to drive awareness and accelerating sales through additional channel partners to complement our direct sales force. We've simplified pricing and packaging for customers by bundling modules into industry-specific solutions and rolling the software, services, beacons, and implementation into one SaaS price. This makes it easier for them to say yes while retaining healthy margins over three- to five-year agreements. Our deployment with Gaylord Hotels by Marriott has just finished. The Opryland, Texan, and Rockies properties have been fully operational, and the Gaylord Palms and National are now live more than a week ahead of schedule. Another wing we're proud of is the Atlantis Resort in the Bahamas, which has notably helped the organization take in $1.2 million through the app in less than a year and was recently recognized by HSMAI at the Adrian Awards. On the blockchain side, the idea behind FunCoin and FunToken is really astounding. A marketplace between brands and consumers where brands can reward consumers for the right to engage them. Brands benefit by being able to identify and engage more effectively, whereas consumers benefit through the tokenomics of the marketplace. This is a far superior model compared to the Web2 economy where user's data is someone else's product and it doesn't belong to them. Our objective with the blockchain initiative is to disintermediate that outdated Web2 surveillance model. That said, we're taking a slow and steady approach on this given the current crypto winter and regulatory headwinds. Our offerings will be privacy-preserving and fully compliant. The first steps we've made are with the Fun Wallet app, and we've recently added the Fun Blocks game in version 1.5 where users can earn and spend Fun Token. This proof of concept has consumers earning and spending crypto with a wallet. FundWallet 1.6 introduces videos and an offer wall, allowing brands to reach and reward consumers for their participation. Eventually, we see this as part of our SaaS offering for brands to engage with their customers. We'll be able to include ads and offers as a module in our industry solutions that will let brands reach the audiences they want. On the hardware side, our Light business unit equips consumers with the gear they need, providing cost-effective high-end PCs to gamers. Now that the team has relocated its facility in Round Rock, Texas, and implemented a new ERP system, we expect profitable operations and growth going forward. Light has several key priorities for 2023. We're introducing workstations to the product mix, extending our reach to power business users. We're also optimizing Light's unit economics with firm targets for cost per acquisition, CPA, and cost per build, TPB, that will ensure profitable growth. And now our CFO, Matt Aune, will cover our financial performance.

Thanks, Russ, and good afternoon, everyone. I'd like to thank you all for joining us today for a review of our full year 2022 financial performance and our progress against key strategic initiatives. For clarity, I'll be discussing GAAP financial measures unless otherwise specifically noted. Our press release 8K website provide a reconciliation of all GAAP and non-GAAP financial results. Net revenues for the full year 2022 totaled $21.8 million, which represents 105% growth year over year. Our platform revenue represented 30% of net revenues, or $6.5 million. Our hardware revenue, or light by firmware, represented 70% of net revenues, totaling $15.3 million. Gross margin was 23.3% compared to 33.9% last year. On a non-GAAP adjusted basis, gross margin was 24.3% compared to 43.9% last year. Platform gross margin was 53.8% compared to 46.8% last year. We are encouraged to see platform gross margins increase year over year, as we continue on our long-term goal to achieve 75% plus gross margins for platform revenue. Secondly, our new business line, Light by Funware, has a different gross margin profile than we have had in the past. We have done a lot to fully integrate Light into Funware over the past year, and we are pleased to see gross margin dollars increase nearly 7x from Q4 2021 to Q4 2022. As expected, with a full year of Light by Funware operational expenses in 2022, versus just Q4 in 2021, we did see a significant increase in operational expenses. Total operating expense was 34.6 million, up from 20.5 million last year. Other non-cash operating expense items were stock-based compensation, amortization of intangibles, and impairment of goodwill in 2022, making up a combined 5.6 million this year, compared to 4.1 million in the prior year. By excluding these one-time and non-cast charges, adjusted operating expense was $29 million compared to $16.3 million last year. Non-GAAP adjusted EBITDA loss was $23.5 million compared to $11.7 million last year. Net loss was $50.9 million or $0.51 per share compared to $53.5 million net loss or $0.71 per share last year. Shares used to calculate earnings per share were $99 million this year versus $75.4 million last year. Our backlog in deferred revenue at the end of the quarter totaled $8 million. Moving to the balance sheet, we closed the quarter with $2 million in cash and $9.7 million in debt. We currently hold approximately $6 million of cash and digital assets based on today's prices. We are actively working on several options to expand our operational runway. and have recently agreed to terms with Streeterville Capital to defer our final four debt repayments to the second half of 2023. This will enable us to further evaluate various debt and equity options to fund operations as we continue to push towards cash neutrality. We will remain active with both financial conferences and investor meetings in our efforts to tell our story and further strengthen our corporate profile in the capital markets. The next major financial conference we'll be attending is the 18th Annual Needham Technology and Media Conference, May 16th through the 18th. We look forward to many one-on-one conversations and meetings with high-class institutional investors at the event and other financial conferences as opportunities present themselves. With that, I would like to turn the call over to Randall.

Thanks, Matt. I also want to thank the analysts and shareholders who have continued to support Funware despite what feels like one market catastrophe after another. From the pandemic, to the war in Ukraine, to inflation and possible recession, we've weathered the storm. Of course, Roosevelt did warn, a smooth sea never made a skilled sailor. I assure you, we are skilled, resolved, and charting the right course. As I mentioned last November, I intend to focus my comments around five core objectives. First, improving the features and scalability of funware to not only drive adoption and shorten our sale cycle, but also enhance our margin profile. What excites me most is we now have notable reference customers in three of the largest markets where our solution can solve the biggest pain points, healthcare, hospitality, and the workplace. Digital transformation in healthcare alone is a half a trillion dollar market, with the largest driver being eHealth due to its ability to increase patient satisfaction and reduce operational costs. While our feature-rich digital front door is an industry leader, scalability will rely on our ability to measure and justify a more definitive return on investment. To address this head-on, we've engaged an expert third party to help analyze and define the financial impact of our digital front door as well as our LBS solution. We expect to begin sharing the results of this study by the end of Q2. While the global market for smart hospitality is projected to reach $60 billion by 2028, It's growing at nearly double the rate of health care, and we're seeing analogous interest across our pipeline. As Russ highlighted earlier, our smart hospitality solution at Atlantis Bahamas generated over $1.2 million in 2022, but over half of that was prior to guests' arrival. Guests were downloading the app, exploring all 140 acres of Paradise Island, planning their experiences, and spending money all from the comfort of home. This kind of success is how we sold Gaylord Hotels by Marriott. In six months, we've deployed our smart hospitality solution across the entire Gaylord Hotels portfolio, which at over 12 million square feet represents five of the top 10 largest non-gaming convention center hotels in the United States. However, what I'm most proud of with this deployment is that it required no new code, which is a testament to our engineers and the investment we made in our platform during the pandemic. Going forward, this will greatly improve our margin profile as well as help us scale more strategic accounts. I'm also thrilled to announce we've begun rolling out a configurable LBS solution to specifically target convention centers. This dynamic mapping and wayfinding capability will help event attendees route to the right exhibits while organizers can message attendees based on proximity or persona. Organizers and venues can seamlessly reconfigure Convention Center space, and our routes will adjust to account for any new layouts without additional hardware fingerprinting. Lastly, on the product front, we recently announced the availability of our Experience Optimizer. This feature enables a single mobile application to autonomously deliver any number of experiences by seamlessly configuring and launching a unique JavaScript object notation that contains specific information on layout, features, themes, content, integrations, and maps. Although each experience is launched from a single mobile application, every experience can load and function like its own native mobile application based on building, persona, or even sub-brand. Of course, no amount of features will matter if we don't solve for our second core objective of scaling revenue as well as activating indirect channels by ensuring our partners have the training, collateral, and proper incentive structures in place to be successful. We recently executed partner agreements with Diversified, Ingram Micro, and Siemens that are considerably more coordinated and directive than past relationships. For example, Ingram Micro is already committed to upwards of five qualified leads per quarter, while Diversified hosted company-wide training on Funware for all of its representatives this month. We believe this kind of channel partner buy-in and engagement will be critical to scaling revenue this year. However, given the nature of the healthcare and hospitality industry in particular, some of our customers may ultimately represent our most important channels. To that end, we are in the process of deploying another Marriott property, Waalea Beach Resort in Maui, but that new customer has led to strategic discussions with Marriott about how to more effectively partner going forwards. To support these sales efforts, and with the help of a third-party expert, we are in the process of auditing our entire sales process along with associated collateral. Expect to see tighter language around our fundamental value propositions with objective ROI justification to help us not only prospect, but also shorten our sales cycle. Another important change we've made to shorten our sales cycle is streamlining our contracts and pricing. Our new approach to selling is an all-in methodology that accounts for software licenses, hardware, professional services, and support at one easy-to-understand price per year. Despite this purposeful focus on our SaaS solutions, we remain committed to our third core objective of launching a compliant blockchain ecosystem that better incentivizes and authenticates consumer engagement. We don't believe blockchain is a pivot or a distraction, but rather a natural extension of our SaaS offerings that seeks to reimagine how brands engage with consumers. Imagine a resort rewarding you for following a treasure hunt to exciting new amenities just as easily as a hospital rewarding you for showing up on time. As Russ already highlighted, we have made significant advances to FundWallet that will help us better integrate this kind of functionality and generate revenue while offering consumers additional opportunities to engage and earn fund tokens. In parallel, we are excited to announce that we are working closely with Securitize to target the first half of this year for an initial issuance of approximately 25% of Fundcoin's maximum supply with regulated trading to follow shortly thereafter. We also remain committed to our fourth core objective of ramping sales and improving margins of light by streamlining operations and being more disciplined with our marketing efforts. By targeting a cost per acquisition of $120 and a cost per build of $20, We are confident in our ability to not only drive light to break even, but also position the business to scale profitably. In Q2, we also plan to launch new lines, such as workstations, to increase the size of our serviceable market and take advantage of our growing brand awareness. Last, but certainly not least, the ongoing transition to Russ's leadership has furthered our fifth core objective to engage more investors with a focus on institutions to drive awareness, volume, and stronger price appreciation. We will continue to work closely with Gateway, Roth Capital, and H.C. Wainwright to attend conferences and participate in non-deal roadshows to share the FundWare story more broadly. We have also been given great opportunities to engage new shareholders through partnerships with industry luminaries like John Najarian and Mark Lopresti at Moneta Advisors. In closing, I want to personally thank all 106 of FundWare's employees and reiterate our 10 operational goals this year. Foster teamwork and minimize distractions. be more disciplined in the allocation of resources, align resources with core competencies, focus on ideal customers and partners, update positioning and marketing to better sell our core value proposition, productize internal tools, identify inorganic targets to accelerate commercialization of key capabilities, launch fund coin, reduce cash burn, and minimize dilution. For closing remarks, I'd like to turn things back over to Russ.

Thanks, Randall. I've been aboard about three months now, and I can confidently say I'm excited for the progress we've made in my short tenure and the trajectory we're positioning ourselves for. We've started the year with a renewed focus on marketing and sales execution in this unpredictable economy. We are working to aggressively grow our platform bookings to improve overall gross and net margins. As we transition the majority of our energy to platform sales, we expect overall net revenues to be relatively flat year-over-year, while expecting quarter-over-quarter growth and improvements to both our backlog and adjusted EBITDA. That said, we also expect to cut year-over-year losses as we continue a push toward cash neutrality. Finally, we are encouraged that the M&A market has become more attractive for buyers. We're excited to announce that our Board of Directors has created a Strategic Transactions Committee led by Stephen Chin to enhance our efforts to creatively grow the business through inorganic transactions. I want to thank all of the Fundware employees, customers, and shareholders for the opportunity and the honor to lead the next chapter of this emerging success story. We may not always get everything right, but we will be bold and put the full weight of our effort into maximizing shareholder value as we reimagine how brands engage consumers in a mobile-first world. I would like to open up the call now for questions to the operator. Operator, please go ahead.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Thank you. Our first question comes from Darren Aftahi with Roth MKM. Please go ahead.

Hey, guys. Thanks for taking my questions. And hi, Russ. Good to speak with you. So you guys detailed a lot of different things, a lot of moving parts. It seems like you've had a tremendous amount of success with your mass platform in hospitality and healthcare. And I just think with, like, the back-to-work debate continuing, I'm curious, like, When you think about strategic objectives, Russ, for the mass platform, maybe top three going forward, I guess what really are those? And then maybe one for you and Randall. It's good to see the gross margin on the mass segment grow. How sort of on a calculus basis do you kind of funnel down improvements and operations down to that 75% target? Thanks.

Thanks for the question. Uh, so our top three priorities for the mass platform, uh, I would say is bookings growth. That's number one. We have a good young working solution, very solid product and very happy customers with it. Uh, the second would be product roadmap, uh, progress, which is further enhancements development on the platform itself to make it more compelling and provide higher value add. functionality to our customers to give them greater revenue uplift and a better ROI. The third priority for that line of business, I would say, would be to strengthen our marketing and sales execution, so to increase our footprint there. There's a little bit of customer education and market education here, and we want to be the thought leader in this space. Oh, and by the way, Randall is not available for Q&A.

um it's baby time for him so let's wish uh daddy some good luck and the new mommy here too hey hey darren um i'll help out with that gross margin question as well i think you know for us it's you know to improve the margins above the line we need to you know have more kind of no no code deployments and that's really like what we did with marriott where we were able to quickly deploy all the locations without a lot of additional code which means essentially we're not doing services above the line. And so that's kind of first and foremost what does it. The other thing is kind of back to Russ's first point is we've got to get more bookings, we've got to get more deals. We've got a great support organization that, you know, mostly is charged above the line and they can scale up a lot more. And so I think as we get more deals, they're going to be able to scale up more without adding a ton of resources. So I think those are kind of the two ways that we improve those margins.

And maybe if I could squeeze one more in. So on the no-code side, like, is that applicable for any vertical at this point? And do you think, you know, signing of agreement to deployment cycle has shortened as a result of that? Or is Gaylord a little bit of a one-off?

We actually expect more engagements in the future look like Gaylord, where it's out of the box, it's an industry template solution, and there's no custom code. It's just the configuration of the solution in their environment. And because we've also previously built integrations to the electronic health record systems in healthcare, and corollaries on hospitality. We don't think there's as much work to do there. There may be some, you know, some customers may have specific systems they want custom integrations for, but we expect that to represent the minority of the work supporting those improved margins.

That's helpful. Thanks, guys.

Thank you. Our next question is coming from Scott Buck with HC Wainwright. Please go ahead.

Good afternoon, guys. Thanks for taking my questions. First one, you know, you've had some nice big customer wins here over the last few months between Gaylord and the expansion of VHC. But I'm curious what the current selling environment looks like for some of these larger deals, just given, you know, what seems like an ever-increasing level of macro uncertainty.

Well, we've seen, you know, continued evolution in our pipeline opportunities. They have not change their pace as a result of the bank takeovers and other recent uncertainty. So we've not seen any impact there as far as our process and sales. And further, just on a macro basis, we expect hospitality as an industry to grow six, seven percent this year. So there's really no good reason for them to slow down either.

All right, that's helpful. And then could you remind us the seasonality of the light business? I guess I'm a bit surprised to see, you know, relatively flat revenue versus the third quarter despite the holiday season.

Yeah, I could jump in. Yeah, I mean, typically we're going to see more bookings in Q4. You know, the backlog will drive up typically Q4 and Q1 will be the bigger quarters. I will say, you know, more specifically with light, and you can kind of, you know, dig in once we file the K here as well. We did have a little more focus on profitability in Q4 this year. I'm sorry, last year versus some of the prior quarters. So, you know, of course, we're driving as much top line, but we were also trying to get the CPA costs down, and so that might have had some impact there. But at the end of the day, we were able to, you know, drive better margins by doing that, so.

Great Matt. That's helpful. And then last one for me, it was at a bit of recovery with, uh, some of the digital currency valuations. I'm curious kind of what the plan is with the remaining digital assets you have on the balance sheet.

Yeah, sure. So, um, you know, we still do have some, you know, Bitcoin, Ethereum on the balance sheet. You know, I think our approach right now, um, you know, like I said on the call, we've, we've got some runway here to kind of figure out what we're going to do is kind of next steps in terms of a debt or equity. But, you know, essentially from our point of view and in talking to investors and the board, I think it's important for us to, you know, if we need to use digital assets, that we'll liquidate them, use those for operating. And that obviously, you know, lowers the chance of diluting people further or taking on additional debt. So right now we're focused on kind of managing that as closely as possible. Certainly as it goes up, that benefits us. And, you know, we'll kind of just, evaluate that on a day-to-day, weekly basis in terms of how we liquidate that or how long we keep it. But certainly that's part of our strategy going forward, and we'll see in the next couple of months what our longer-term strategy will kind of just let everybody know.

Great. I appreciate the additional call, guys. Thank you very much.

Thank you. Our next question is coming from Ed Wu with Ascendant Capital. Please go ahead.

Yeah, welcome, Russ. My question is on M&A. You mentioned that you guys are going to be evaluating it. Have you seen significant improvement in or depressed pricing for M&A target, and what are any particular focus targets that you guys are interested in?

Well, what we've – I can't speak to pricing at this point, but I can tell you there are more people who are willing to have conversations given market conditions and their prospects going forward. We're looking for companies that are a good alignment with our core strategy around the enterprise sales offering. So either companies with a complimentary offering or, you know, in a complimentary market to us or a piece of technology that would help us accelerate the product roadmap. And, of course, Matt can describe what we might be looking for from the financial criteria to whatever extent he wishes.

Yeah, I think, you know, like Russ said, we don't, we're not down the road far enough where we're seeing, you know, pricing in terms of more depressed pricing. I mean, we all expect that. Yeah. And I think, you know, first and foremost, obviously, you know, the company, the type of companies we're looking at Russ explained, but, you know, certainly we're not looking to add any more burn rate onto the company or bringing any companies that are not going to be accretive on cash or break even at a minimum. So, Those are kind of criteria, and we'll see. I mean, our expectation is that we'll be able to get a better deal, you know, now, second half of the year, than we may have, you know, in the middle of 2022 or 2021. Great.

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

Thank you. Thanks, Ed.

Thank you. Our next question is coming from Howard Halpern with Taglik Brothers. Please go ahead.

Good afternoon, guys. Welcome, Russ. In terms of potential bookings growth, are you seeing maybe some flow from your newer integrators or newer partners rather than some of them that have been around a longer period of time?

We are definitely seeing active interest and movement from our newer partners. I wish Randall were here to field your question about some of our longstanding partners as well, since I'm a little bit less acquainted with their activity. But we are definitely seeing excitement and interest from our new partners that, of course, supplements our current partners and our direct sales effort.

And are you seeing potentially this, you know, maybe smaller deals that can get done quicker and that build into larger deals? Is that Is that maybe part of the game plan to basically get in and then move within an organization?

Definitely. So one of the things that we've done, like Randall talked about, simplified packaging and pricing, we also want to be competitive in the pricing area. And one of the ways that we're also trying to do that because our product works so solidly is do a proof of concept where that's appropriate. Or if it's, say, a customer who has multiple locations, to do a pilot at one of those locations to show them how well it works. because we're quite confident in any kind of a trial that we're going to come out as the winner.

Okay. Okay, guys. Everything else was asked and answered, so thanks and keep up the good work.

Thank you. Thanks, Howard.

Thank you. We have reached the end of the question and answer session, so I will now turn the call back over to Mr. Bice for closing remarks.

Well, I'd just like to thank you all for coming to this session today. This is my first, and so I also appreciate the grace here as I get used to this cycle. I am very optimistic about this coming year. I am really looking to be very aggressive with bookings on the enterprise SaaS side and profitable unit economics and growth with the light unit. So we've got a lot of work to do, but I also feel very good about the mission and the team we've got to do it and the markets that we're going to serve.

Thank you.

This does conclude today's conference and you may disconnect your lines at this time and we thank you for your participation.