Phunware, Inc.

Good afternoon, ladies and gentlemen, and welcome to Fundware's second quarter 2023 investor conference call. Currently, all participants are in a listen-only mode. Joining me today are Russ Bice, Chief Executive Officer, and Troy Reisner, Chief Financial Officer. The format today will include prepared remarks by Russ and Troy, 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. Additionally, the matters being discussed today may include non-GAAP financial measures, Reconciliation of gap to non-gap 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 Funware's CEO, Russ Weiss. Sir, please proceed.

Thank you very much, and welcome to our second quarter 2023 investor conference call. We made several significant moves this quarter that will position our company for success, including bringing in a new CFO and implementing strong cost reductions. In addition, we also shifted our lead generation to an account-based approach and welcome a new category of customer to the Funware fold. One of the main wins I am most proud of is having Thumper Pond Resort as a new Funware customer, an oasis of relaxation and recreation located in the heart of Minnesota. With its championship golf course, luxurious spa, world-class dining, and an invigorating indoor water park surrounded by over 200 acres of verdant woodland, the resort offers a captivating escape for its guests. This resort is representative of an entire segment of mid-market hospitality brands that can affordably and effectively use our location-based platform to offer their guests the best possible experience. This segment is one slice of the $146 billion U.S. market. As part of our revamped sales and marketing initiative, Fundware was also proud to exhibit for the first time at the Hospitality Financial and Technology Professionals Annual Hospitality Industry Technology Exposition and Conference Show in Toronto, Canada in June, where the world's leading hospitality brands connect with technology partners. 6,000 attendees visited the Toronto Convention to meet with 325 technology companies, generating for us more than 50 direct leads from hotels, casinos, and resorts who are primarily interested in our wayfinding and guest messaging solutions. Funware stood out as the clear leader in guest wayfinding technology among the other vendors. Despite this being our first high-tech show, there was a steady stream of interest at our booth as we showcased our partnership with Atlantis Bahamas and their comprehensive guest experience app. The Funware story that resonated with customers was that though we were a relatively new entrant to hospitality, our experience deploying reliable mobile apps with accurate wayfinding and contextual engagement that enables new revenue generation was a natural for them. We met with stakeholders from hotels, casinos, and resorts who were primarily interested in our wayfinding and guest messaging solutions. At Hitech, there were many vendors who offered mobile guest experiences independently or as part of a broader platform, but none focused on combining wayfinding with personalized messaging. Funware's patented blue dot accuracy combined with our AI-assisted curated and targeted marketing campaigns clearly make us superior in both dimensions compared to the rest of the pack. The landscape for property management system, point of sale, and other hospitality essential software is incredibly fragmented, and every vendor at HITECH flaunted their integrations, but it was unclear how many were actively deploying them. Going forward, Funware will continue to separate ourselves from the competition by focusing on prospects with a distinct need for wayfinding and contextual engagement while we simultaneously identify the most critical integrations and use cases needed to deliver our uniquely positioned guest-facing solution to our clients. On the product side, Funware made steady progress on our mapping and engagement modules, extending our lead as the go-to, best-in-class for wayfinding, navigation, and customer engagement. We've also improved our locate tool, allowing our deployment teams to configure facilities faster and for less cost. These combined moves, from marketing events to lead generation to sales engagement and continued product innovation, position us squarely where we want to be to bring contextual engagement to hospitality, healthcare, and beyond. Our light unit, offering high-end PCs for gamers, introduced its first workstations late in this quarter. While we have high hopes for this higher margin product line, we expect growth to be gradual as we roll out promotion of these offerings through influencers and social channels. We continue to optimize Light's performance to drive toward profitability while evaluating strategic options for this business unit over the medium and long term. We also welcomed Troy Reisner as Funware's new CFO. Troy has already made a substantial impact at Fundware, bringing fiscal discipline to help us reduce our cash burn and accelerate us down the path toward growth and profitability. He's been instrumental in restructuring our debt and negotiating terms with prospective investors. And with that, I will turn it over to Troy to talk about 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 second quarter 2023 financial performance and progress on key strategic initiatives. On a personal note, I joined FundWare as its CFO about two months ago, and it's a privilege to become part of the talented FundWare team. As we move through our second quarter results, 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. With that said, let's take a look at the numbers. Net revenues for the second quarter of 2023 totaled approximately $3.5 million, of which our platform revenue represented 37% or $1.3 million, and our hardware revenue represented 63% or $2.2 million. Gross margin was 13.1% compared to 27.7% last year. On a non-GAAP adjusted basis, gross margin was 16.3% compared to 28.6% last year. Our platform gross margin was 41.4% compared to 64.9% last year. Hardware gross margin was negative 3.6% compared to 12% last year. A significant contributor to the drop in hardware gross margin stemmed from an increase during the quarter of our inventory reserve of approximately $300,000. We have already begun efforts to sell any excess inventory to free up working capital. In addition, with the improvement in light supply chain, we are focused on managing our inventory on hand much more efficiently to increase inventory turnover, decrease working capital needed, all while continuing to meet customer demand. Total operating expense was approximately $8.7 million, inclusive of a $1.2 million goodwill impairment, which is down from approximately $9.1 million last year. Other non-cash operating expense items for the quarter were stock-based compensation and amortization of intangibles, making up a combined $1.5 million this year compared to $800,000 in the prior year. By excluding these non-cash charges, adjusted operating expense was approximately $5.9 million compared to approximately $8.2 million last year. We are pleased to see that our non-GAAP operating expense decreased quarter over quarter for the fourth consecutive quarter. Non-GAAP adjusted EBITDA loss was $5.2 million compared to $6.6 million last year. Adjusted EBITDA loss was narrowed for the third consecutive quarter as we continue executing our plan to break even. We still have a ways to go, but we are committed to continuing the necessary discipline to not only achieve our goal, but move beyond it. Net loss was approximately 6.5 million or 6 cents per share compared to a net loss of approximately 17.2 million or 17 cents per share last year. The weighted average shares used to calculate earnings per share was approximately 105.1 million versus approximately 97.7 million last year. Our backlog and deferred revenue at the end of the quarter totaled $5.2 million and was the same for last year. Moving to the balance sheet, we closed the quarter with approximately $1.1 million in cash. During the quarter, we liquidated substantially all of our remaining digital assets to fund operations. In addition, we have strategically utilized our at-the-market offering, or ATM, to raise additional cash to give us a launching pad for the remainder of the year. A significant priority for us has been to simplify our debt stack by allowing approximately 2.8 million outstanding warrants to expire in July, which were remaining from our 2020 convertible notes. In addition, we expect to finalize the restructuring of our short-term debt in the near future while we continue to evaluate several other financing opportunities. Now that we've gone through the financials, I wanted to address a couple of topics before handing the mic back to Russ. First, With the management transition completed, we are focusing our teams to unveil the full potential of Fundware as our world progresses further down the path of a digital-first environment. As part of that, we are committed to reducing our cash burn. A significant first step was to right-size our organization. In July, we reduced our workforce by approximately 33% across all departments and implemented other cost savings that we expect to provide annual run rate cost savings of up to $5 million. We do not expect these cost saving reductions to have any significant impact on serving our current customers or achieving significant growth. Complementary to that initiative is our focus on sales and marketing. Since our location-based platform is an industry leader, we are laser focused on ensuring we're maximizing our potential in the marketplace. As Russ noted, we are expanding our marketing partnerships and, at the right time, may consider further investments in our internal sales and marketing teams. Next, I have received many questions about Funware's identity in terms of our business model. Are we a software or a hardware company? While Russ and I inherited our hardware business like technology, we want to be clear that the core of Funware is a software as a service and a location-based services company in the mobile application realm. As Russ mentioned, we are currently focused on the hospitality and healthcare sectors where we do well. SAS and LBS is where we expect to invest to fuel our growth along with seeking complementary inorganic opportunities. That said, while we continue to diligently operate and optimize light technology, we are taking the next several months to evaluate and weigh strategic alternatives for light. 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. Upcoming major financial conferences we plan to attend are the H.C. Wainwright 25th Annual Global Investment Conference in New York on September 11th through the 13th, and the Roth MKM's 12th Annual New York Conference on November 15th. We look forward to many one-on-one conversations and meetings with institutional investors at that event and other financial conferences as opportunities present themselves. With that, I'd like to turn the call back over to Russ for closing remarks.