Q3 2023 Phunware Inc Earnings Call
Okay.
Good afternoon, ladies and gentlemen, welcome to fund, whereas third quarter 2023 Investor Conference call.
All parties are in a listen only mode.
Joining me today are Mike Snavely, Chief Executive Officer, and Troy Research Chief Financial Officer.
The format today will include prepared remarks 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.
The matters being discussed today may include non-GAAP financial measurements.
Conciliation of GAAP to non-GAAP financial information is set forth in the earnings press.
But it's available on the Investor Relations section of fund where supply at investors Dot Fund, where dotcom I further encourage you to visit investors not unaware at dotcom to access not only the earnings press release, but also the current investor presentation, and SEC filings and additional collateral on footwear.
At this time I would like to turn things over to fund where CEO Mike Snavely. Please proceed.
Thank you very much and welcome to our third quarter 2023 Investor Conference call.
In my short time back and fun, where 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 Companys strategy moving ahead.
Some of you may know that I served as EVP of software for fun. We're in the 2015 16 timeframe.
We built that business to about $25 million in annual most of which were recurring.
So when I was approached to return as the company's C. R. O 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 we're happy renewing and buying more.
And that the basic issue was a failure of sales execution and.
I need to think more deeply about how we can monetize our technology advantage.
The board concluded than what the company needs now 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 find where 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 way finding is demonstrably superior to that of major competitors like Aruba Meridian and more.
According to customers and prospects, who are evaluated them yet.
Further the companion product location marketing think offer is triggered by a combination of who you are and where you are.
Is delivering value to customers today with increasing adoption.
Second our solution as 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 networks for a five year term.
We also saw a renewal at Mayo clinic in Rochester through our partner <unk>.
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 wins.
And to create new integrations into other software they used 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.
Our synergy between their hardware and systems integration work and our consumer facing mobile applications.
We believe our pipeline and partner strengths are good indicators of future bookings performance as we continued to drive discipline into the sales process.
In our hospitality segment, we negotiated an outcome with Marriott corporate about the branding of the widely a 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 Gameboard 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 consummated 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 health care, 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 noncore and consuming cash.
We've also reduced staff head count 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 fund where technology.
Our strategy will be to build teams bag 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 fund were including some exciting announcements on how will 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 will be discussing GAAP financial measures unless otherwise specifically noted.
Our press release 8-K, 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.
With 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.
non-GAAP adjusted basis gross margin was nine 8% compared to 17, 9% last year.
A significant impact to Q3's gross margin was a noncash write down of life inventory of approximately 500000.
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 54% 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 life.
Total operating expense was approximately $18 7 million inclusive of a $13 2 million goodwill impairment during the quarter.
Other noncash operating expense items for the quarter were stock based compensation and amortization of intangibles, making up a combined 925000, this year compared to $1 million in the prior year.
By excluding these noncash 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 rightsize our cost structure.
Net loss was approximately $19 million or <unk> 16 per share compared to a net loss of approximately $8 million or eight cents per share last year.
Weighted 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 totaled 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 a rail capital.
Shortly thereafter, we executed an amendment that keep August 1st which was filed as an exhibit to our second quarter. Thank you.
As a reminder, as of August 1st our note payable at the Streator Hill capital was approximately $7 2 million, which is payable at approximately nine monthly installments of $800000.
In addition, surgical capital has the option at its election to convert the outstanding balance to equity.
Any conversion, we're 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 800000 and the conversion of 800000 notes for approximately $3 4 million common shares.
Also in October through Yoko capital converted 600000 of the remaining notes for approximately $3 7 million shares.
<unk> distributable capital agreed to forebear their remaining October cash payment of $200000.
As of November one our outstanding balance is approximately $4 96 nine.
Now we've gone through the historical financials and 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.
For the quarter with 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 annualized savings to approximately $6.0 million.
Further progress continued subsequent to Q3 examples include restructuring, our SaaS product sales delivery and service model.
As Mike mentioned, we have kept our people with the ability to scale our resources as needed.
We have substantially aligned our head count to support this new delivery model, which allows us to operate with 28 people today instead of 81.
As a result of our streamline 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 31.
We paid an early termination fee of approximately 67000 and.
And eliminated our future lease obligations of approximately 300000.
Additionally, we have reached an agreement in principle with the lesser of the light warehouse to early terminate our lease effective November 30.
We expect to pay an early termination fee of approximately 197000, which will consist of releasing our security positive 77000 in.
And cash of about 120000, which we believe will come from proceeds related to selling life inventory and other assets.
So lets termination, we will eliminate our future lease obligations 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 will be successful in either path with our with respect to this Austin facility.
And finally, a quick update regarding <unk> ability to continue to navigate our current business environment. As we've previously discussed and disclosed <unk> 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 if necessary.
We will remain active with both financial conferences, and investor meetings, and our efforts to tell our story and further strengthen our corporate profile and the capital markets with that I'd like to turn the call back over to Mike for closing remarks.
Thanks Troy.
We've just covered recent developments in our sales and finance will now turn our attention to our vision for the future of fund, where which we're calling one of them where it's readout.
Our vision is to drive the ubiquitous adoption of fund where technologies to connect brands audiences and soon our digital asset holders.
This triangle of values serves as the foundation of our unique proposition that monetize as anyone anywhere while preserving the value of the consumers' data.
We believe that our value is directly proportional to the aggregate size of the mobile audience using fund where technologies and we will be employing strategies to drive that audience size as quickly as possible.
There are three pillars to this vision.
First we will continue to sell our patent protected location in way finding technologies in combination with our location market offering.
We will migrate over time towards selling these as software components delivered as SDK as into existing mobile applications with large existing audiences.
Our traction with some of the largest brands in hospitality.
Combined with our existing integration with epic the number one EMR provider in the U S.
Hudson is in a great position to deepen those relationships with embedded software.
Second we will continue to explore new and additional ways to monetize our patents and other intellectual property.
We believe we need to do a better job of exposing the value. We believe exists within our IP portfolio and we are taking steps to highlight its value under different scenarios.
We are developing a multi pronged strategy around our IP portfolio, which includes assessing its value utility and deployment in the global digital ecosystem.
We believe that our IP can be monetized in various ways.
Pursuing recoveries for past and ongoing infringement.
Entering into IP licenses and software licenses with embedded IP.
And entering into other arrangements with partners to purchase finance and or help us further monetize our IP.
We also continue to explore opportunities to expand our use of artificial intelligence.
There is a new standalone product or embedding AI into existing products.
Finally.
We remain committed to completing our digital asset in blockchain ecosystem for consumer and customer engagement.
We will continue to move towards creating a decentralized data and engagement economy to put consumers and small businesses in charge of their data and enable customers to reach and engage with them on a mutually beneficial basis.
Why did we pause.
The regulatory uncertainty for digital assets, including utility tokens in ft projects has been disruptive to our ecosystem.
We continue to monitor the recent digital assets regulatory and enforcement actions, particularly around utility tokens and are working hard to ensure our ecosystem remains compliant with the evolving regulatory framework.
We believe it is time to continue implementing our vision and ecosystem, while navigating the regulatory uncertainty.
As such we expect fund token to evolve and play an important role in our ecosystem.
Foreign coins to evolve and be the primary product and commercialization focus of our ecosystem.
And fund the wallet to evolve and remain as the primary mobile first connection for consumers and small businesses to the ecosystem.
We are working with secure ties to finalize and intend to officially launch fund Cohen for trading in the next several months barring any unexpected digital asset market developments.
In parallel we expect to file a reg a offering for fun coin to enable future purchases of the assets.
We will provide more information on our digital assets ecosystem, including fun coin launch.
And the offerings during quarter four 2023.
I would like to open the call up now for questions through the operator.
Operator, Please go ahead.
At this time, if you would like to ask a question. Please press the star and one on your telephone keypad.
Once again to ask a question please press the star and Guan.
You may remove yourself from the queue by pressing star two.
We'll take our first question from Scott Buck with H C. Wainwright Your line is open.
Hey, good afternoon, guys. Thanks for taking my questions. Just a couple quick ones from me first.
Mike how quickly do you think you can monetize.
Token and wallet and what is the kind of additional investment dollar wise required there to get it to a point that you can monetize it.
Pleasure to meet you and thanks for the question.
We've done a lot of the work.
Plain and simple and this this is kind of goes back two or three years as I understand it kind of watch the company from the outside during that period of time.
Didn't expect a ton of incremental investment to be able to bring the.
The assets to market.
Really really at all.
Now how long will it take us to monetize our chief legal counsel is working through right now.
Along with some experts.
Kind of the.
The area of digital assets.
And kind of figure out how all these things should link together the.
The sequence and timing associated with that we believe that we're going to be able to be fairly definitive about that within the fourth quarter here, which really means in the next few weeks. So stay tuned pleased for more definitive guidance on the win.
But from a investment standpoint, we don't expect to consume a lot of cash.
Cashing in.
Getting to the starting line so to speak.
Okay perfect. Thanks for that and then second on light.
I guess I'm, a little confused by the commentary on the call are winding the business down or is there a potential sale opportunity or are both kind of a little up in the air at the moment.
One Guy was down for sure go ahead, Troy why don't you.
You've kind of play a lead on that.
Okay.
Scott Thanks for the question Yeah.
Kind of use terminology winding down or are exiting and so.
We're pursuing.
Two courses preparing to shut.
Shut down.
Or sale. So we're working both of those paths and should.
Either direction.
Have it wound down by the end of the year.
Okay perfect. That's it for me guys I appreciate it thank you.
Thanks Scott.
We'll take our next question from Howard Halpern with <unk> Brothers. Your line is open.
Hi, good afternoon guys.
So Mike if you could talk a little bit more about I guess the software the pipeline that's.
Of engagement you envision occurring in Q1 of next year could you.
Add a little context to it in terms of maybe initial engagement size and then the opportunity within each engagement to grow.
And.
Really to grow within each engagement.
Yeah, you bet, John happy to do that so.
We have an existing software business.
The performance of that software business has not been what anybody expected and that's a big part of the reason I'm here.
What I'll say is this we have.
A few dozen opportunities in the pipeline right now across hospitality and health care.
We find that the health care opportunities are going to be.
Larger are probably on average three X larger in terms of annual revenue.
And then the hospitality ones for a number of different reasons, not the least of which is the size and the sort of the visitor traffic through these facilities and also there's a different way of sort of looking at calculating the return on investment for such a thing, but with that said we expect to enter.
Into.
A handful of new contracts, yet this quarter and into the first quarter of next year that.
There is going to range in <unk>.
In value from something like $50000 annually on the lower end for some of the smaller resorts et cetera properties to more like 150 or $200000 annually for some of the hospital properties now beyond the initial sale, which is typically going to be.
Fixed contract annual fee for a term of typically three to five years.
We are pretty frequently seeing upsell opportunities in both segments of the business. So for example.
Youll have theres, a lot of acquisition and consolidation in hospitals, so youll see additional facilities being brought online.
There's kind of a rough proportionality between the number of square feet that we're covering and the fee. So if we double the size, we roughly double the fee that sort of thing.
And then in the hospitality segment, we will often see.
Opportunities for us to create more digital engagement with the guest by adding additional features into the application. So imagine the case for example, and this is this is a real live example from one of our large hospitality customers.
Think about digital keep so instead of using plastic car to use the mobile phone to enter the door.
A big area of investment for lots of these properties and we can control the digital front end of that key experience. So those are a couple of vectors anecdotally I've seen a couple of.
Accounts that have grown by roughly double within sort of a 2253 year timeframe.
As a result of.
A couple of these phenomenon that I mentioned.
Okay.
And then in terms of.
What the strategy is going forward in terms of direct sales versus using your channel partners.
Should we look at that over the next year or two.
We're going to continue to have a direct sales operation in fact.
I'm going to be bringing some of the old band back who were instrumental in helping us drive to the $25 million number that I mentioned earlier on the call.
These are people, who really know how to sell and so our direct sales operation will continue to be supported by account based marketing content marketing really establishing ourselves as a thought leader and then getting our customers to tell their stories to the market as well.
We will continue to invest in our relationships and I mentioned.
<unk> business has seen its connect us to there are a number of others, including by the way one of the largest.
Digital key providers.
In the in the World actually.
Have become a part of our partner ecosystem.
The number of deals that we have in the pipeline right now approximates a third.
Of the pipeline from the standpoint of deal count It represents more like 45% of the pipeline in terms of dollar volume.
So we're finding that the channel deals.
They come to us because of the synergy reasons that I described earlier.
And we're finding on average, they're a little bit bigger than some of the directly source deal. So we will continue to invest.
Invest in cultivating those channel relationships in addition to.
Running our direct sales team.
It's a complex technical sale, which means that we're providing a ton of support.
For the sales process to our partners irrespective when they're present in the deal and so we'll continue that sort of.
Intimate partnership at the deal level with those channel partners.
Okay.
Thanks and.
Look forward to the upcoming quarters.
Thanks, so much I appreciate the call.
As a reminder to ask a question. Please press star one on your telephone keypad.
Remove yourself from the queue by pressing star two.
We'll take our next question from Ed Woo with <unk> capital. Your line is open.
Okay. Thank you for taking my question and welcome to fund where again my question is it sounds like you're targeting some bigger hospitality clients. So it looks like possibly bigger deals will that require greater investment in the sales cycle as well as to should we expect the sales cycle to kind of be extended as these deals appear to be bigger.
I think that's a perfectly reasonable assumption, let me, let me speak to that a little bit. So we will continue the individual property rinse and repeat selling cycle and I'm talking specifically about hospitality health care is really kind of the same thing.
In parallel with that and so what I'm looking for is a little bit of an all the above strategy and what I mean by that is yes, we'll sell individual properties, but I want a bootstrap my way into real conversations with the largest.
Hotel brands in the World as we start to develop critical mass with our individual properties and so imagine a case, where we take an existing hotel loyalty app that has tens of millions of users and we're able to incorporate our location features including the <unk>.
Marketing and the way finding solution into that application so overnight we get.
An enormous amount of usage, which we believe is going to be directly proportional to the value that we can charge for that frankly, and then ultimately the value we can.
Extracts from the overall ecosystem to include all the digital assets components as they come online so by their nature of those deals will take longer to run, but we will be able to mop up not individual properties, but hundreds perhaps thousands of properties at a time as a result of that strategy. So.
Two different approaches to different.
Kind of timelines for maturity I wouldn't be at all surprised if it took a year.
To incorporate our technologies into a major application.
Application like the one that I'm talking about but.
In the meantime, we will continue the blocking and tackling at the individual property level.
Okay.
Thank you for answering my questions and I wish you. Good luck. Thank you.
Thank you Sir.
It appears we have no further questions at this time I would like to turn the floor back to Mike <unk> for any closing remarks.
Thanks, a lot everybody.
<unk>.
Likely.
Tax the patience of our investors.
We believe that we're going to be in a position to put the company back on a solid financial footing.
And Troy spoke to that in detail and when would you expect to have additional announcements forthcoming in the coming weeks.
Small number of months.
But I came back here to finish submission.
I have a lot of respect for the.
Leadership that preceded me for sure.
But I believe that.
This fresh look at where we can take the company is exactly what we need at this moment.
Wouldn't be here unless I believe that we have a strong likelihood of success. So we thank you very much for your attention and patience and please stay tuned thank you.
This does conclude today's program. Thank you for your participation and you may disconnect at any time.
Yeah.
Yes.
Yeah.
Okay.
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