Phunware, Inc.

and fully compliant offering will include ads and offers to help brands reach audiences they want, and it will complement our industry solutions to give our customers greater power to reach their existing and prospective users. On the hardware side, our light business unit faced the same headwinds affecting the whole PC market in Q1. However, we managed to outperform the industry averages while maintaining discipline on customer acquisition and materials costs. And now our CFO, Matt Downey, 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 first quarter 2023 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 first quarter, 2023, totaled $4.7 million, of which our platform revenue represented 28% of net revenues, or $1.3 million. Our hardware revenue, or Lite by Funware, represented 72% of net revenues, totaling $3.4 million. Gross margin was 7.6% compared to 26.1% last year. On a non-GAAP adjusted basis, gross margin was 12.9% compared to 26.8% last year. Platform gross margin was 5.5% compared to 57.2% last year. On a non-GAAP adjusted basis, platform gross margin was 23.4%, compared to 58.9% last year. The cost for the year-over-year drop can be primarily attributable to a mismatch of cost of goods sold and the revenue associated with it. As previously mentioned, we are extremely excited to have completed the Gaylord deployment in Q1. However, GAAP revenue recognition for this project requires that the revenue be taken over the five-year life of the contract, which means all the costs associated with deploying the multiple locations in Q1 are not offset by revenue in Q1. If we were to be able to match the revenue, our non-GAAP gross margin for software would be much closer to last year. This will happen from time to time as we continue to build up a bigger base of SaaS revenue that ultimately we will be able to absorb the shift in margins from a single project during the quarter. Our hardware business, Light by Funware, continues to show operational improvement by trimming the business units adjusted EBITDA loss by 46% quarter over quarter. with a target of reaching profitability in the next one to two quarters. Total operating expense was 7.6 million, up from 6.8 million last year. Other non-cash operating expense items were stock-based compensation and amortization of intangibles, making up a combined 1.3 million this year, compared to 0.7 million in the prior year. By excluding these non-cash charges, adjusted operating expense was 6.3 million, compared to 6.1 million last year. We are pleased to see that our non-GAAP operating expense was dropped quarter over quarter for the third consecutive quarter. Non-GAAP adjusted EBITDA loss was 5.6 million compared to 4.2 million last year. Adjusted EBITDA loss was narrowed for the second consecutive quarter as we continue on the path to break even. We still have a ways to go to get to break even, but we are committed to showing improvement in this metric and look forward to sharing long-term break even plans in the future. Net loss was 4.3 million or $0.04 per share compared to $14.9 million net loss or $0.15 per share last year. Weighted average shares used to calculate earnings per share were $103.2 million versus $96.8 million last year. Backlog and deferred revenue at the end of the quarter totaled $5.7 million. As Russ mentioned, we have several large yields at a late stage in the pipeline and expect the Q1 backlog and deferred revenue number to be a low point for the year. Moving to the balance sheet, We closed the quarter with 0.7 million in cash and 5.7 million in debt. We currently hold approximately 2.8 million of cash and digital assets based on today's prices. We are actively evaluating 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, and the 2023 Cantor Fitzgerald Tech Conference, June 14th through the 15th. We look forward to many one-on-one conversations and meetings with high-class institutional investors at those events and other financial conferences as opportunities present themselves. With that, I'd like to turn the call over to Randall.

Thanks, Matt. During the quarter, we took great strides to streamline how we price, contract, and bundle our core offerings. For a simple annual license, any enterprise can launch a branded mobile application that is configurable, scalable, and capable of any number of integrations with third-party point solutions to include our very own best-in-class location-based services that delivers real-time blue dot and advanced wayfinding. At Funware, we can now take care of everything from any required hardware, to professional services, to maintenance, so our customers are only responsible for a straightforward software license. This is actually an important change that has been very well received by our prospects. In the past, we still sold like a custom development shop that resulted in overly complicated contracts and sometimes sticker shock, but now we are offering simplified SaaS pricing we believe will drastically improve our sales cycle and close rate. Enterprise customers don't need to settle for low code templated apps that will not scale and are limited in both features and functionality. They can now launch an enterprise grade mobile application on our proven platform for less than $5,000 a month. Our platform approach is important because our customers benefit from all the product improvements we are making. For example, We successfully tested our configurable location-based services solution at Gaylord Opryland Resort and Convention Center in Nashville. This is something that many vendors have tried but failed to deliver and was something of a unicorn in the conference industry. However, Funware has made the impossible possible. Our platform can finally help event attendees optimize their time and route to the right exhibits while giving organizers the ability to personalize attendee engagements. Conference organizers and venues can seamlessly reconfigure convention center space, and our routes will adjust to account for any new layouts without additional hardware or fingerprinting. We are thrilled to be working closely with several strategic partners who will be reviewing our solution live next month. These partners are able to open significant doors across the hospitality industry, both locally and abroad. Speaking of conferences, we were thrilled to partner with TD Cenex at HIMSS in Chicago this year and showcase our digital front door to numerous healthcare prospects. We also made great connections at VIVE in Nashville, and next month we'll be at BITAC in Las Vegas for casino resorts, as well as HITECH in Toronto, which remains the premier hospitality conference each year, where we'll be showcasing our amazing work for Atlantis Bahamas and Gaylord Hotels by Marriott. Regarding blockchain, we are still on track to issue approximately 25% of Funcoin's maximum supply for Securitize this summer, with regulated trading to follow thereafter. At this time, we are working to ensure all rightful holders have been notified and given time to properly set up their accounts. With a successful test of FundBlocks via FundWallet, we are also looking at new ways to drive fund token utility and leverage its functionality within third-party applications. Switching gears to Lite, we are excited to announce our new workstation line will be available this summer as well. which will increase the size of our serviceable market and take advantage of our growing brand awareness despite headwinds in the industry due to macroeconomic trends. For closing remarks, I'd like to turn things back over to Russ.

Thanks, Randall. To conclude, I am very happy with the progress we've made this past quarter and the changes we've made to extend our reach and deepen our contacts with customers in our target markets. You can expect more developments on these fronts from us going forward as we invest more time and energy into sales and marketing. We're all about market growth, meeting customer needs with our market-leading solution focused on contextual engagement. Expect to see bookings growth and spending discipline to control our OPEX. At the same time, our Strategic Transactions Committee is actively looking for opportunities to grow the business through inorganic transactions. And one last thing. We are no longer using the term multi-screen as a service, or MAZ, as it fails to capture the range and significance of the investments we've made in our software platform. We call it our location-based platform, which is about more than just a screen and whose capabilities any enterprise can activate almost immediately. We deliver everything you need to engage anyone, anywhere in a mobile-first world where context matters. 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 and 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 please while we poll for questions. Thank you. Our first question is coming from Darren Aftahi with Roth MKM. You may proceed.

Hey, guys. Good afternoon. Thanks for taking my questions. Two, if I may. On your pipeline, can you characterize, I guess, one, how that's changed in the last 90 days and maybe what verticals those deals are in right now?

Sure, Darren. Go ahead.

So I was just going to say that good to hear your voice again and how things have changed over the last quarter as we see more opportunities to join the pipeline and the ones that were kind of the middle stages are now in later stages. And the two verticals that we see the most activity in are in hospitality and healthcare, which are our two favorites.

Great. And that kind of leads to my second question. Given the inroads you've made in hospitality and all the hoopla around generative AI, I'm just wondering, is that any sort of roadmap in terms of integrating that into your platform, just in terms of opportunity to provide clients with maybe more revenue opportunity or lift over time? Thanks.

Well, AI is something we're certainly keeping an eye on, especially as large language models that have come up with very naturalistic written speech and speaking, excuse me, written language, which of course could be turned into spoken as well. And we're just looking for opportunities like where that would make sense for us to plug it in. You know, we are about contextual engagement, which is reaching those consumers where they are and when they are. And so there may be an application in the way that we offer essentially, if you will, the writing that will allow them to reach those customers. We're still looking at that.

Great. Maybe one last one for Matt. Just your comments about the mismatch on revenue and deals and costs, when you call that Gaylord. Is there any way to kind of smooth that out, or is that just a function of GAAP accounting and it's kind of out of your hands and control? Sure.

yeah i mean it is it is more or less a function of gaffey county um certainly over time as we're able to deploy quicker with less resources um there's not going to be as much of that upfront work uh and also you know as i mentioned on the call i mean we've got to build up a bigger base so like you know if there's you know one customer this happened to last quarter it had a pretty significant impact on the margins whereas You know, next year, if something like that happens, it might only change margins by two or three points. So it's a matter of we need to grow that base more. And then as we mature more and more, these deployments will get faster and faster. I mean, Gaylord was already fast, but still there was a significant amount of work just going to the five different sites. But we should see that improve over time. It's just nothing that we can do kind of in the short term just because of the gap accounting rules. Thank you.

Thank you. Our next question is coming from Scott Buck with HC Wainwright. You may proceed.

Hi, good afternoon, guys. Thanks for taking my questions. I'm curious, could you give us just a little bit of color on what expectations are in terms of scaling up the partnership with Siemens and maybe when we could expect to see some incremental revenue from that partner?

Well, we are... we're sort of hot off the presses in announcing that Siemens partnership. So, you know, there's a period of kind of bring up of getting that partnership going and doing the cross training and whatnot. But we do expect to see, you know, deals kind of enter the pipeline, you know, within a quarter or so that will be related, especially to the smart workplaces, you know, certainly with Siemens strength there. And it's going to really be a function of Siemens kind of working set of opportunities themselves. But like I'm expecting to see, concrete business that we do directly out of that partnership within a quarter or two.

That's helpful, Russ. And then on the hardware business, it looks like, you know, revenue is down kind of 20% year over year. Is that just, I mean, macro environments and people cutting back on discretionary spending, or is there something else going on there? And as a follow-up, I seem to remember you guys were going to had some new products there in the pipeline. What's the status of those?

Yeah, thanks for asking. The entire PC market, including Macs, is actually off quite a bit in Q1. The PC group was basically off almost 30%, and Apple, their Mac sales were down 40%. So we actually were tracking 10 points ahead of the cohort there in the PC space. And so what we've done is really just focus on the cost discipline around customer acquisition costs and make sure that we stay in line with our build costs as well. So we're tracking kind of ahead of plan. If we had kind of a normal market, I think that we'd be seeing, you know, greater revenue out of that as well as better at the bottom line too. And you asked about wider products for the light units. we are expecting to introduce the workstation lines this quarter. So that will give us offerings that are aimed at power business users, and that's a good complement to the gamer market that we already serve.

Great. That's helpful. And then last one for me, just on OpEx, you guys have done a nice job kind of reeling that in versus the last few quarters. Curious if you have some additional levers there to pull or, you know, what we're looking at this quarter is kind of the expected run right here for the rest of the year.

Yeah, Matt, I'll let you talk about that one.

Yeah, sure. Yeah, no, I mean, this is something we're constantly looking at. You know, like I said on the call, we've had a couple consecutive quarters of reducing it, and we anticipate Q2 will be reduced as well. So, I mean, in terms of levers, I mean, we're, you know, Majority of our optics is headcount. And so we're, you know, we're evaluating the headcount and making sure we're right size for the number of deals we have. We have made a few, you know, trimmed a few here and there towards the end of last quarter that you're not really seeing the impact of in Q2 yet. So I think there'll be a little bit of savings there. And then we'll just kind of evaluate going forward and, you know, make sure that, you know, the staff we have is the staff we need to continue to grow. But yeah, Again, it's going to be a slow process. I don't see, you know, we're going to drop a million or two in OpEx in a single quarter, but it's mostly just a process of continuing evaluating and making sure that we're trimming those expenses quarter over quarter.

Great. Appreciate that, guys. Thank you very much.

Thank you. Our next question is coming from Howard Halpern with Taglik Brothers. You may proceed.

Good afternoon, guys. Are you, with the pivot, I guess, towards much more now the software as a service, the SaaS-based model, are you seeing less hesitation by customers than, because a lot of businesses are seeing hesitation deploying funds, but with your business model now and your customers or customers in the pipeline, are they really committed to going forward with the projects?

Yes, they are committed, and what we've done, which is in simplifying the pricing for them, we've taken kind of fewer variables for them to have to consider. You know, we had formerly had broken out all the costs around fulfillment and beacons around location-based services, and everything was kind of unbundled, and we kind of rebundled it together. And it just makes it easier for them to understand. And it's also easier for them to say yes, because they don't have to contemplate sort of being their own, thinking about every little option and addition that goes in there. And also what you heard Randall talk about earlier there, we've also lowered the floor, if you will. So now we have a bundle where customers could get started for as little as $5,000 a month. And so that gives us much more range and variability in terms of the packaging that we can offer. It doesn't affect the margins or the size of opportunities at the enterprise end. It merely opens the middle and the lower end more.

Okay. And in terms of your partners, you know, I know you just announced Siemens, but prior announcements, are most of those up and running, fully trained, and bringing in leads?

We have a few that are up and running like that, and we're working on more partnerships where we expect to broaden this, especially in markets where we don't have a direct sales effort. It's not exclusive to that, but as mentioned with Siemens, they're doing a lot of work about kind of building and constructing the smart workplaces in the future. And that's not an area where we have like a specific outbound focus from within Funware. And so we're looking for those kinds of players. And of course, we've got, we've improved kind of the training materials and the structure of the agreements to make it easier to train their sales folks, as well as to give them the proper incentives to be our advocates here. So eventually this will turn into a model where instead of kind of co-selling with them, it's pure indirect where they can completely do it on their own. Okay.

And one last one from that, I guess, going back to the mismatch in revenues, especially, you know, with Gaylord you brought up. But the revenues now that you'll be able to recognize going forward, they're going to be extremely high margin revenue if not 100% revenue.

Yeah, certainly. Certainly. So, yeah, that portion that's kind of devoted to the deployment is, you know, will essentially be 100% gross margin going forward and that will be blended in with our kind of support and maintenance continuing for the next several years. So it will get right-sized over time. It's just a bigger impact in the first quarter there, as we saw.

Okay. And in the hardware, you're still seeing improvements in performance

gross margin you're not you know you're going to maintain that discipline going forward and improving it as much as you can quarter to quarter yeah um so gross margin gross margin quarter of a quarter did dip slightly in q1 um and there's some various factors that we're still working through in terms of inventory management and and getting products out the door. However, on an overall basis, while the light business did lose some money, it did improve quite a bit quarter over quarter and had its best quarter since we've even owned the company. And so bottom line is doing well. Our customer acquisition costs have trimmed quite a bit from Q3 and Q4 of last year. So we finally kind of feel like we're in the fine-tuning process here where we're going to be able to get this thing to to break even or better in the next one to two quarters. So hopefully this quarter, but we'll see if it happens this quarter or not.

Okay. Well, thanks, guys. Yep.

Thank you. Our next question is coming from Ed Wu with Ascendant Capital. You may proceed.

Yeah. Have you noticed any change in the pipeline given the uncertain economic environment in your sales cycle?

Yeah, the way I would characterize it is just a little bit more slowness, a little bit more caution. We haven't seen any dropout of the pipeline, but this is kind of a multi-stakeholder decision when it comes to the enterprise end. And so they are kind of double-checking their alignment and their own forecasting. I mean, even despite interest rates being at kind of a local high for the last decade or more, hospitality is having a good year and so we expect them to keep going and of course health care is is pretty counter cyclical in nature so this is more a function of the natural budget cycles combined with a little bit more slowness due to that uncertainty great thanks for answering my questions and I wish you guys good luck thank you thank you

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

Well, I have nothing further to add. I think our comments really kind of covered everything. I'd like to thank you all for your time. I do think this is still, despite kind of the economic environment, still a very good time to have the product we do that does what it does. in contextual engagement using our location-based platform and being able to really help brands improve the quality of their guest experience, their patient experience, as well as reduce their costs and enhance their revenue. So there's no season where that is not attractive.

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