Phunware Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 4 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to FundWear'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.

Operator

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 GAAP to non GAAP financial information is set forth in the earnings press release, which is available on the Investor Relations section of Funware's website at investors. Funware.com.

Operator

I further encourage you to visit investors. Funware.com to access not only the earnings press release, but also the current investor presentation, SEC filings and additional collateral on FundWear. At this time, I would like to turn things over to FundWear's CEO, Russ Vice. Sir, please proceed.

Speaker 1

Thank you very much, and welcome to our Q2 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 funwear fold. One of the main wins I am most proud of is having Thumper Pond Resort as a new fun of our customer, an oasis of relaxation and recreation located in Heart of Minnesota with its championship golf course, luxurious spa, world class dining and an invigorating indoor waterpark 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.

Speaker 1

This segment is one slice of the $146,000,000,000 U. S. Market. As part of our revamped sales and marketing initiative, 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.

Speaker 1

Despite this being our first high-tech show, There was a steady stream of interest at our booth as we showcased our partnership with Atlanta's 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 way finding 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 way finding and guest messaging solutions. At Hy Tech, there were many vendors who offered mobile guest experiences independently or as part of a broader platform, But non focused on combining wayfinding with personalized messaging, FundWear'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 of Hy Tech flaunted their integrations, but it was unclear how many were actively deploying them.

Speaker 1

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 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.

Speaker 1

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 FundWear's new CFO. Troy has already made a substantial impact at 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.

Speaker 2

Thanks Russ and good afternoon everyone. I'd like to thank you all for joining us Today for a review of our Q2 2023 financial performance and progress on key strategic initiatives. On a personal note, I joined FundWear as its CFO about 2 months ago, and it's a privilege to become part of the talented FundWear team. As we move through our Q2 results, I'll be discussing GAAP financial measures unless otherwise specifically noted. Our press release, 8 ks and website provide a reconciliation of all GAAP to non GAAP financial results.

Speaker 2

With that said, let's take a look at the numbers. Net revenues for the Q2 of 2023 totaled approximately $3,500,000 of which our platform revenue represented 37 percent or $1,300,000 and our hardware revenue represented 63% or 2,200,000 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 point 4% compared to 64.9% last year. Hardware gross margin was negative 3.6% compared to 12% last year.

Speaker 2

A significant contributor to the drop in hardware gross margin stem 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 $8,700,000 inclusive of a $1,200,000 goodwill impairment, which is down from approximately $9,100,000 last year. Other non cash operating expense items for the quarter were stock based compensation and amortization of intangibles, making up a combined $1,500,000 this year compared to $800,000 in the prior year. By excluding these non cash charges, adjusted operating expense was approximately $5,900,000 compared to approximately $8,200,000 last year.

Speaker 2

We are pleased to see that our non GAAP operating expense decreased quarter over quarter for the 4th consecutive quarter. Non GAAP adjusted EBITDA loss was $5,200,000 compared to $6,600,000 last year. Adjusted EBITDA loss was narrowed The weighted average shares used to calculate earnings per share was approximately $105,100,000 versus approximately $97,700,000 last year. Our backlog and deferred revenue at the end of the quarter totaled $5,200,000 and was the same for last year. Moving to the balance sheet, we closed the quarter with approximately $1,100,000 in cash.

Speaker 2

During the quarter, we liquidated substantially all of our remaining digital assets In addition, we have strategically utilized our at the market offering or ATM to raise additional cash A significant priority for us has been to simplify our debt stack by allowing approximately 2,800,000 outstanding warrants to expire in July, which were remaining from our 2020 convertible notes. In addition, we expect to finalize the 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 Funware 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.

Speaker 2

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 $5,000,000 We do not expect these cost saving reductions to have any significant impact on serving our current customers or 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 FundWear's identity in terms of our business model. Are we a software or a hardware company?

Speaker 2

While Russ and I inherited our hardware business, like technology, we want to be clear that the core of Fundware is a software as a service 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 13th and the ROTH MKM's 12th Annual New York Conference on November 15.

Speaker 2

We look forward to many 1 on 1 conversations and meetings with With that, I'd like to turn the call back over to Russ for closing remarks.

Speaker 1

Thanks, Troy. I am very happy to see us add a new category of customer to our portfolio on ThumperPond And I'm optimistic about our ability to reach and serve the mid market hospitality segment with solutions previously thought only affordable by the big brands. I'm also delighted at the response we received at Hy Tech underscoring the value and impact that our LBS platform offers to the hospitality industry. We made the tough decision to lean out our workforce and reduce our other expenses wherever we can to put us in the best possible position for the journey ahead. At the same time, we've made rapid progress on our product roadmap and are working on additional innovations that will extend the reach and depth of our solutions.

Speaker 1

I would like to open up the call now for questions through the operator. Operator, please go ahead.

Operator

Thank you. The floor is now open for questions. And our first question today is coming from Darren Aftahi from ROTH, MKM. Darren, your line is live. Please go ahead.

Operator

Hi, guys. Thanks for taking my questions. 2, if I may. Russ, just your commentary about the hospitality space And some of the wins you've seen, I guess, I sense the level of excitement there. Is there a way that you can go to market in sort of a broader kind of approach?

Operator

Meaning, Are there larger entities that could get you into multiple properties faster? Or do you feel like you need to go kind of location by location? And then I guess as it pertains to The healthcare verticals didn't hear too much about that. Just what are you seeing in terms of like from now the end of the year line of sight in terms of what could actually Add to backlog or actually end up being revenue generation for you in the LBS space.

Speaker 1

Hey, Darren. Good to hear your voice. I'm glad you're still sticking with those multipart questions. They're always refreshing. To answer your first question, which is about kind of approach to the market, is it singletons, is there a greater way to There absolutely is.

Speaker 1

So we have some channel partners who are actually walking us into some of these accounts where they have existing relationships. We also have referral relationships. And of course, we have our direct sales force, which is using a new more direct kind of approach to prospects. But we do have kind of multiple ways to get these brands. So it's not just one at a time, And it's not one channel at a time either.

Speaker 1

And this is very helpful because what we find is there are natural partnerships, Natural complementary offerings between the companies who have relationships with the brands we're trying to reach and ourselves because they don't have an offering like ours. So that's how we're doing that. You asked about healthcare. We didn't rack up like a notable win in healthcare. We did like a minor extension with one of our current customers.

Speaker 1

But I would say our pipeline is rich with both healthcare and hospitality. It has a few other verticals in it too like smart workplace, But we expect to see and announce later in the second half of this year, even potentially this quarter, some significant business in the healthcare space with name brands There. So hopefully I have addressed your full questions.

Operator

Great. And then Maybe a multipart for Troy, since it's new and welcome Troy. So two things, not putting words in your mouth, but in furry, it Sounds like you're evaluating options for light and maybe that's not strategically part of the plan for Fundwear long term. I guess Any truth to that? And then second point, workforce reduction in $5,000,000 in annualized savings.

Operator

Can you just kind of give us a sense for When that starts to kind of benefit the P and L, is that on a quarterly basis, I guess, dollars 1,250,000 is Fully going to be baked into the Q3 given where you did the cuts or is that further on down the road in the year where we

Speaker 2

Well, Darren, thanks for the question. And I like the 2 parter as well. So first, light technology, our hardware business, as I said, Russ and I came into this and it's not part of our core business model, but we have it and it's an asset and we want to utilize it the best we can. So we're working hard with Light and the team to make that a Profitable venture, but we're also looking at how do we what are our other options In the future, I think we're going to take the next balance of the year and we're going to look at those options, weigh them And then make a longer term decision, hopefully by the beginning of the year around light. And then with respect to the cost reductions, the reduction in workforce took place in mid July.

Speaker 2

So we won't see the full effect of that in Q3, but we will see it in Q4 and we'll see A fair bit of it hit yet in Q3.

Operator

Great. Thank you. Thank you. Your next question is coming from Scott Buck from H. C.

Operator

Wainwright. Scott, your line is live. Please go ahead.

Speaker 3

Hey, good afternoon, guys.

Speaker 1

I'm curious, you have

Speaker 3

some nice wins in the hospitality sector. I'm thinking Atlantis, Gaylord. When does this kind of Location based services, when does it become mandatory to play in this kind of upscale resort space? I mean, when did the dominance really start to fall in the industry?

Speaker 1

Yes, that is the question of the hour, isn't it, right? So in early stage markets, it's all about Trying to establish just one foot in front of the other, one win followed by the next. And then you get this you start to see the exponential growth kick in. And In a year or 2 after that, then everybody thinks that they've got to have it because it's just part of table stakes to be in a business that they're in. My guess is as good as yours perhaps, maybe a little bit better.

Speaker 1

But I think that what we'll see is Wind start to stack up a little bit more in numbers and then also in bookings. And then like by the middle of next year, I expect to see like a noticeable climb. And I don't mean flat until then, but I just mean we'll start to see like the strong evidence of that climbing. Sorry, someone talking there in the background?

Speaker 2

Yes. I didn't catch that question either, Russ.

Speaker 1

Yes. I was still in the middle of answering a question about growth rates. Can everyone hear me up to that point?

Speaker 3

Sorry, guys. That's it for me. Thank you.

Speaker 1

Okay. So we are expecting to see momentum start to build in the later part of the year. The last A bit of information I'll give there is among the new prospects that we see entering the pipeline, we're finding a higher proportion of them already Have the awareness. They're tuned into the problem of the guest experience, of the patient experience, of the get lost problem, of the Lost staff time and tried to give directions, the frustration that causes their visitors and guests. And so we're seeing a more informed

Operator

Thank you. Your next question is coming from Lucas Ward from Ascendiant. Lucas, your line is live. Please go ahead. Okay, thanks.

Operator

Hi, guys. Yes, this is Lucas Ward in for Ed Woo. Good afternoon. Hello. Yes.

Operator

So, I was wondering if you could give an update on the FundCoin Fund Token platform. I'm just curious Whether that's is there still sort of a development path for that, that helps grow the company's business?

Speaker 1

Yes. Thanks for asking about that. That is definitely a part of our plan. Obviously, we're doing a little bit of a reset this quarter and kind of adjusting our pace of progress. We are still planning to issue Fundcoin this summer, per our last quarter statement, and you should be hearing more from us about this Like in the coming weeks, but it is still part of the strategy and part of the product roadmap.

Operator

Okay, great. Thanks. And just one follow-up question. Back to the ThumperPond win, I was curious just to have a little more color about how that came about, like which channel generated that?

Speaker 1

That actually came from our direct sales force. And I don't know the exact genesis, but it was One of our folks who joined us in the spring, so relatively new to the company,

Operator

and got a

Speaker 1

hold of the owner And talked about kind of the advantages and the benefits that we could offer for a property like theirs. So this is I am excited about this. One of the nerdy things I didn't mention is this is a customer that's not requiring like a full beacon install to take advantage platform. So they're going to be using both the wayfinding and the messaging to get closer to their customers without us Having even to send a team there to set it up. So this is really exciting for us.

Operator

Cool. Sounds good. Okay. That's it for me. Thank you very much.

Operator

Thank you. To ask the question. And your next question today is coming from Howard Halpin from Taglich Brothers. Howard, your line is live. Please go ahead.

Speaker 3

Good afternoon, guys. I wonder if you could also talk a little bit about The recent win with the new luxury high rise in Houston and you consider that sort of a different type of vertical That has great potential across the U. S.

Speaker 1

Yes, happy to talk about that. That is absolutely the case. So we can serve multiple verticals, but as you've heard me say ad nauseam, we focus on our outreach with hospitality and healthcare, but we do have some channel partners also in other markets like smart buildings and this Houston opportunity is Exactly that. So we had a partner involved in that transaction and they're basically setting up a smart residential building with all of the integrations For that a tenant could want access to the building, parking, door locks, the whole thing. And so our solution was just a natural fit and slid right in there.

Speaker 1

We think we can do a lot more of those. The pace of smart building It's been a little bit slower just with higher interest rates, but we think that we've got like a killer solution here and we've got Experience with integrations galore, that make us pretty close to an out of the box solution.

Speaker 3

Okay. And could you talk a little bit about Your strategy in expanding within like Atlantis and Gaylord throughout their properties Across the country and upon this.

Speaker 1

Sure. So one of the things we've done is try to refine our sales pitch. So we're focusing on kind of the core mapping and wayfinding capabilities. And then from there, like the next leg up for a lot of them is using our mobile engagement, which lets them have that closer relationship with the customers, Send them messages, whether it's property wide or when they say enter the parking lot or enter the hotel, or let them know as they're passing a point of interest, And so that's kind of how this kind of rolls out. And of course, if you're in hospitality space, We are working on basically a door access capability.

Speaker 1

Our first version was out on iOS this past quarter. And that will allow us To kind of plug in, in these facilities where they have smart door locks for the guests there to just use their smartphone through the branded app to Get into their rooms, and then it expands from there. So there are a lot of other channels and more things we want to do with them.

Speaker 3

Okay, guys. Thank you.

Operator

Thank you. And there are no further questions in queue at this time. I would now like to turn the floor back to FundWear's Chief Executive Officer, Russ Bies, for closing comments.

Speaker 1

Well, thank you all for continuing to follow FundWear. As you can see, we're still very much a work in progress, but we've got a solid product. We are establishing the sales momentum. I've seen both improvement in quantity and in quality in our sales pipeline. We're enlisting more channel partners and we're reaching out Through those partners to the markets that we can't reach directly and also in accordance or in concordance with those in the markets that we already natively serve.

Speaker 1

So I'm very optimistic about what the second half is. With cost reductions that we've done and the efficiency gains that we have, we think we can make light And more economically performant, we also think we can continue the sales momentum with some significant logos in the second half of this year. So thank you again for your time and attention.

Operator

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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