PHUN - NASDAQ

Good afternoon ladies and gentlemen, and welcome to Phunware's Second Quarter 2023 Investor Conference Call. Currently all participants are in a listen-only mode. Joining me today are Russ Buyse, 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 GAAP to non-GAAP financial information is set forth in the earnings press release, which is available on the Investor Relations section of Phunware’s website at investors.phunware.com. I further encourage you to visit investors.phunware.com to access not only the earnings press release, but also the current investor presentation, SEC filings and additional collateral on Phunware. At this time, I would like to turn things over to Phunware’s CEO, Russ Buyse. 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 Phunware fold. One of the main wins I am most proud of is having Thumper Pond Resort as a new Phunware 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 midmarket 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, Phunware 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. 6000 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. Phunware stood out as the clear leader in guest wayfinding technology among the other vendors. Despite this being our first HITEC 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 Phunware 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 [Technical Difficulty] solutions. At HITEC, 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. Phunware'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 HITEC flaunted their integrations, but it was unclear how many were actively deploying them. Going forward, Phunware 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, Phunware 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 [Technical Difficulty] from marketing events to lead generation to sales engagement and continued product innovation positioned us squarely where we want to be to bring contextual engagement to hospitality, healthcare and beyond. Our Lyte 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 Lyte'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 Phunware's new CFO. Troy has already made a substantial impact at Phunware, 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 Phunware as a CFO about two months ago and it's a privilege to become part of the talented Phunware team. As we move through our second quarter results, I'll be discussing GAAP financial measures unless otherwise specifically noted. Our press release, 8-K 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 Lyte 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 noncash 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 noncash 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. Net loss was approximately $6.5 million and $0.06 per share compared to a net loss of approximately $17.2 million or $0.17 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 [Technical Difficulty] go 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's 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. 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 Phunware's identity in terms of our business model, are we a software or a hardware company? While Russ and I inherited our hardware business Lyte Technology, we want to be clear that the core of Phunware 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. SaaS and LBS is where we expect to invest to fuel our growth along with seeking complimentary inorganic opportunities. That said, while we continue to diligently operate and optimize Lyte Technology, we are taking the next several months to evaluate and weigh strategic alternatives for Lyte. We will remain active with both financial conferences and investor meetings and 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 HC Wainwright 25th Annual Global Investment Conference in New York on September 11th to 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.

Thanks, Troy. I am very happy to see us add a new category of customer to our portfolio in Thumper Pond and I'm optimistic about our ability to reach and serve the midmarket hospitality segment with solutions previously thought only affordable by the big brands. I'm also delighted at the response we received at HITEC 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 road map and are working on additional innovations that will extend the reach and depth of our solutions. I would like to open up the call now for questions through the operator. Operator, please go ahead.

[Operator Instructions] And our first question today is coming from Darren Aftahi from ROTH MKM. Darren, your line is live. Please go ahead.

Hi, guys. Thanks for taking my questions. If I may Russ, just heard your comments here about the hospitality space and in some of the wins you've seen, I guess, I sense a level of excitement there. Is there a way that you can go to market in sort of a broader kind of approach, 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 vertical, didn't hear too much about that. Just what are you seeing in terms of like from now to 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?

Hey Darren good to hear your voice. I'm glad you're still sticking with those multi-part questions are 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 increase the surface area, they're absolutely yes. So we have some channel partners that 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. Correct kind of approach to prospects, but we do have kind of multiple ways to get to these brands. So it's not just one at a time and it's not 1 channel at a time either. 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 it like a minor extension with one of our current customers. But I would say our pipeline is rich with both healthcare and hospitality. It has a few other verticals in it too like a 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 was name brands there. So hopefully I've addressed your four questions.

Great. And then may be a multipart for Troy since he's new and then welcome Troy. So two things, not putting words in your mouth but inferring it sounds like you're evaluating options for Lyte and maybe that's not strategically part of a plan for Phunware fun where long-term I guess any truth to that? And then second point, the workforce reduction and $5 million in annual life savings, can you just kind of give us a sense for when that starts to benefit the P&L, is that a quarterly basis, I guess $1.25 million, is that fully going to be baked into the third quarter given what you did the cuts or is that further on down the road of the year when we start to see the full benefit of those workforce reductions? Thanks.

Well Darren, thanks for the question and I like the two-parter as well. So first Lyte technology, our hardware business as I said, look 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 Lyte, and the team too makes 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 step 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 Lyte. And then with respect to the cost reductions, the reduction in workforce took place in mid-July. So we'll -- 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.

Great. Thank you.

Thank you. Your next question is coming from Scott Buck from H.C. Wainwright. Scott, your line is live. Please go ahead.

Hey, good afternoon, guys. I'm curious, you have 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 dominoes really start to fall in the industry?

Yes, that's 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 then in a year or two after that then everybody thinks that they've got to have it because it's just part of table stakes to be in the business that they're in. So my guess is as good as yours, perhaps maybe a little bit better. But I think that what we'll see is wins get stock 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. I just mean we'll start to see like the strong evidence of that climbing. I'm sorry.

[Indiscernible] current assets that's [indiscernible].

Sorry, someone is talking there in the background.

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

Yes, I was still in middle of answering a question about growth rates, did everyone here me up to that point?

Sorry guys. That's it from me. Thank you.

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

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

Okay thanks. Hi, guys. Yes, this is Lucas Ward in for Ed Woo. Good afternoon. Hello? Yes, so I was wondering if you could give an update on the PhunCoin and PhunToken platform. I'm just curious whether that's, if there's still sort of a development path for that that helps grow the company's business?

Yes. Thanks for asking about that. That is definitely a part of our plan. Obviously, we are doing a little bit of a reset this quarter and kind of adjusting our pace of progress. We are still planning to issue PhunCoin 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 road map.

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

That actually came from our direct sales force and I don't know the exact genesis, but it was one of our one folks who joined us in the spring. So relatively new to the company and he got hold of the owner-operator there at Thumper Pond 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 of our 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.

Cool, sounds good. Okay, that's it from me. Thank you very much.

Thank you. [Operator Instructions] And your next question today is coming from Howard Halpern from Taglich Brothers. Howard, your line is live. Please go ahead.

Hey, good afternoon, guys. 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 US?

Yes, I'm 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 have 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. We think we can do a lot more of those. The pace of smart building has 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.

Okay and could you talk a little bit about your strategy in expanding within? Like Atlantis and Gaylord throughout their properties across, the country need and…?

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 if they're passing a point of interest like say an attraction that they might want to go visit. 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. 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 lot of other channels and more things we want to do with them.

Okay, okay guys, thank you.

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

Well, thank you all for continuing to follow Phunware. 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. So I'm very optimistic about where the second half is with the cost reductions that we've done and the efficiency gains that we have, we think we can make Lyte a more economically performing. We also think we can continue the sales momentum with some significant logos the second half of this year. So thank you again for your time and attention.