Phunware, Inc.

Good afternoon, ladies and gentlemen. Welcome to Fundware's third quarter 2023 investor conference call. Currently, all parties are in a listen-only mode. Joining me today are Mike Snavely, Chief Executive Officer, and Troy Reisner, Chief Financial Officer. The format today will include prepared marks by Mike 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 upon them. Additionally, the matters being discussed today may include non-GAAP financial measurements. 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, Mike Snavely. Please proceed.

Thank you very much, and welcome to our third quarter 2023 investor conference call. In my short time back at Fundware, I've learned a lot. and I'll highlight a few accomplishments of the past quarter to illustrate where we are. I'll talk about our immediate term plans to continue to create a healthier, more sustainable business, and I'll shed some light on the company's strategy moving ahead. Some of you may know that I served as EVP of software for Funware in the 2015-16 timeframe. We built that business to about $25 million in annuals, most of which were recurring. So when I was approached to return as the company's CRO, I embraced this opportunity to get the company back on track and to finish the mission. Upon my return, I found that the technology was sound as ever, the customers we had were happy renewing and buying more, and that the basic issue was a failure of sales execution and a need to think more deeply about how we can monetize our technology advancement. The board concluded that what the company needs now is sales-oriented DNA at CEO, and accordingly, they asked me to take on that role. So I've had the opportunity to say no twice to Funware, and here I am, because I believe our best days are ahead of us. Why do I believe that? First, the product is strong. Our technology in the area of indoor wave finding is demonstrably superior to that of major competitors, like Aruba Meridian and more, according to customers and prospects who have evaluated them head-to-head. Further, the companion product, location marketing, think offers triggered by a combination of who you are and where you are, is delivering value to customers today with increasing adoption. Second, our solution is sticky as customers have historically renewed and bought more. This past quarter, we renewed the $2 billion Virginia Hospital Center, a member of the Mayo Clinic Care Network, for a five-year term. We also saw a renewal at Mayo Clinic in Rochester through our partner, HID. Prospectively, our account health indicators are strong, with substantial upsells in the pipeline. Further, we regularly see customers ask us to deploy our solution into new buildings or wings, and to create new integrations into other software they use to operate their businesses. Finally, we're seeing the beginnings of a turnaround in our new logo acquisition as our account-based marketing approach takes hold. As of today, we have about $8 million in total contract value in the pipeline. Notably, about a third of those are from channel partners like Cox Business, Siemens Connect, and others. These partners and others see what we see, a synergy between their hardware and systems integration work and our consumer-facing mobile applications. We believe our pipeline and partner strength are good indicators of future bookings performance as we continue to drive discipline into the sales process. In our hospitality segment, we negotiated an outcome with Marriott Corporate about the branding of the Waialea Beach Resort on Maui after some time in development. We believe this opens the door to additional business at Marriott branded properties along the lines of our relationship with Gaylord Hotels, which should result in more logos coming from this, the largest hotel chain in the world. We are in pilot with a couple of large resorts and expect those deals to consummate in the first quarter. We're also in the final stages of negotiations with certain large resort properties under major hospitality brands and smaller regionally managed properties. In healthcare, we expect to have new logo announcements in the first quarter based on sales cycles that are advancing now. Additionally, as it pertains to cost containment, as previously announced, we are winding down our light business, which was non-core, and consuming cash. We've also reduced staff headcount overall, and Troy will talk more in detail about those numbers. But we've preserved many of the key people who form the brain trust of Funware Technologies. Our strategy will be to build teams back carefully under the leadership of those long tenured staff members in alignment with the revenue under management. And with that, I will turn it over to Troy to talk about our financial performance. After his remarks, please stay tuned. I'll return to talk about our vision for the future of Funware, including some exciting announcements on how we'll be linking our software business with the relaunch of our digital asset strategy.

Thanks, Mike, and good afternoon, everyone. I'd like to thank you all for joining us today for a review of our third quarter 2023 financial performance and progress reshaping our cost structure. I'll be discussing GAAP financial measures unless otherwise specifically noted. Our press release, 8K, and website will provide a reconciliation of all GAAP to non-GAAP financial results. So with that said, let's take a look at the numbers. Net revenues for the third quarter of 2023 totaled approximately $2.8 million, of which our platform revenue represented 45% or $1.3 million, and our hardware revenue represented 55% or $1.5 million. Gross margin was 7% compared to 16.7% last year. On a non-GAAP-adjusted basis, gross margin was 9.8% compared to 17.9% last year. A significant impact to Q3's gross margin was a non-cash write-down of lights inventory of approximately 500,000. Absent this charge, our gross margin would have been 24.9%, and non-GAAP gross margin would have been 27.8%. Our platform gross margin was 50.4% compared to 46.5% last year, and hardware gross margin was negative 28.3% compared to 6% last year, which is reflective of the inventory write-down at light. Total operating expense was approximately $18.7 million, inclusive of a $13.2 million goodwill impairment during the quarter. Other non-cash operating expense items for the quarter were stock-based compensation and amortization of intangibles. making up a combined $925,000 this year compared to $1 million in the prior year. By excluding these non-cash charges and goodwill impairment, adjusted operating expense was approximately $4.6 million compared to approximately $7.7 million last year. Non-GAAP adjusted EBITDA loss was $4.3 million compared to a loss of $6.7 million last year. Adjusted EBITDA loss was narrowed for the fourth consecutive quarter as we continue executing against our plan to right-size our cost structure. Net loss was approximately $19 million or $0.16 per share compared to a net loss of approximately $8 million or $0.08 per share last year. The rated average shares used to calculate earnings per share was approximately $120 million versus $98.8 million last year. Backlog and deferred revenue at the end of the quarter sold at approximately $4.8 million, slightly down quarter over quarter from $5.2 million. Now moving to the balance sheet, we closed the quarter with cash of approximately $2.9 million. During last quarter's earnings call, we were in the final stages of amending our existing promissory note with Street of Real Capital. Shortly thereafter, we executed an amendment effective August 1st, which was filed as an exhibit to our second quarter thank yous. As a reminder, as of August 1st, our note payable to Streeterville Capital is approximately $7.2 million, which is payable in approximately nine monthly installments of $800,000. In addition, Streeterville Capital has the option, at its election, to convert the outstanding balance to equity. Any conversion would directly offset the cash portion of the monthly amortization. During the third quarter, the note was reduced by $1.6 million through the payment of cash of $800,000 and the conversion of $800,000 of the note for approximately 3.4 million common shares. Also in October, Streeterville Capital converted $600,000 of the remaining note for approximately 3.7 million shares. Fundware and Streeterville Capital agreed to forbear the remaining October cash payment of $200,000. As of November 1, our outstanding balance is approximately $4.96 million. Now that we've gone through the historical financials, before I hand the mic back to Mike, I wanted to provide some further insight regarding progress towards right-sizing operations. The initial cost reduction steps we took during Q3 decreased our average monthly operating expense to about $1.5 million, which for the quarter was a cash savings of approximately $1.5 million or 25%. While the savings from these steps were not fully realized during the quarter, we estimate the analyzed savings to approximately $6.0 million. Further, progress continues subsequent to Q3. Examples include restructuring our SAS product sales delivery and service model. As Mike mentioned, we have kept our people with the ability to scale other resources as needed. We have substantially aligned our headcount to support this new delivery model, which allows us to operate with 28 people today instead of 81. As a result of our streamlined operations and the team's ability to successfully work remotely, we have also negotiated an early lease termination of our San Diego office space effective October 31st. We paid an early termination fee of approximately $67,000 and eliminated our future lease obligation of approximately $300,000. Additionally, we have reached an agreement in principle with the lessor of the Light Warehouse to early terminate our lease effective November 30th. We expect to pay an early termination fee of approximately $197,000, which will consist of releasing our security deposit of $77,000 and cash of about $120,000, which we believe will come from proceeds related to selling lights inventory and other assets. Such termination will eliminate our future lease obligation of approximately $1.7 million. We do expect to execute this agreement within the next week or so. Also, as previously announced, we have committed to exiting our PC systems integration business, Light Technology, which we expect to complete before the end of 2023. However, we do expect a significant direct net cash burn related to Light to cease by the end of November. And lastly, we have engaged a real estate agent to market our remaining office space in Austin while we seek to negotiate an early termination option. Of course, no assurance can be given that we would be successful in either path with respect to this Austin facility. And finally, a quick update regarding FundWare's ability to continue to navigate our current business environment. As we've previously discussed and disclosed, FundWare has several levers available to continue to fund its operations and growth, which include our cash on hand, which currently approximates $2.4 million, our at-the-market offering facility, which has more than 88 million currently available, and our facility with Lincoln Park, which currently has approximately 29.6 million available. And then we can also pursue additional capital raises as necessary. 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. With that, I'd like to turn the call back over to Mike for closing remarks.