Q4 2023 Phunware Inc Earnings Call

Participants

Mike Snavely; CEO; Phunware, Inc.

Troy Reisner; CFO; Phunware, Inc.

Darren Aftahi; Analyst; Roth Capital Partners, LLC

Scott Buck; Analyst; H.C. Wainwright & Co., LLC

Ed Woo; Analyst; Ascendiant Capital Markets

Howard Halpern; Analyst; Taglich Brothers, Inc.

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to Phunware's fourth quarter and full year 2023 investor conference call. Currently, all participants are on a listen-only mode. Joining me today are Mike Snavely, Chief Executive Officer, and Joy Ridenour, 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 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 Foundry's website at investors dot FundWare.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 FundWare.
At this time, I'd like to turn things over to Phunware CEO, Mike Snavely. Please proceed.

Mike Snavely

Thank you. And we welcome our fellow shareholders to our fourth quarter and full year 2023 investor call. We're glad you joined last time I spoke with. You was a couple of weeks after the Board asked me to step into the role of CYO. in the 90 days or so since that earnings release, we've reshaped nearly every aspect of the company with an eye toward delivering predictable, sustainable and profitable growth for our shareholders. Troy, I will run through the details of those actions here shortly.
When I took over this role, there was a fair bit of cleanup that needed to be done. Our balance sheet was burdened with debt obligations. We had litigation exposure in various places, and we were burning too much cash both in the core software business ended the ancillary light business. Most importantly, we lacked strategic focus. Most of these problems are solved and all are well understood as we speak to you today. We built our go-forward plan on a number of bright spots in the business, a highly satisfied and referenceable customer base, clear ROI that our customers are achieving with our solutions and a talented and experienced product engineering team from this strengthen foundation.
We are on a new trajectory for 2024 and are bullish on Phunware's future. I will turn it over to Troy to talk about our financial performance. After his remarks, I'll return to talk about our vision for the future of Phunware.

Troy Reisner

Thanks, Mike, and good afternoon, everyone. I'd like to add my thank you for joining us today for a review of our full year 2023 financial performance and our progress against key cost reduction initiatives. For clarity I'll be discussing GAAP financial measures. Unless otherwise specifically noted, our press release eight K and website provide a reconciliation of our GAAP to non-GAAP financial results. In addition, I will provide insight into our operating expense run rate and how we have strengthened our balance sheet in early 2024. As a reminder, in November, we made the decision to shut down our hardware business line technologies and in accordance with Generally Accepted Accounting Principles lives presented as a discontinued operation in the financial statements.
The shutdown of life was substantially complete in December net revenues from continuing operations for the full year of 2023 totaled $4.8 million as compared to $6.5 million in the prior year. The decline in revenue is due to the sale of $1.5 million of claim token in the prior year. Gross margin from continuing operations was approximately 34.9% compared to approximately 53.8% last year with the prior year margin, again benefiting from the sale of fund token operating expenses from continuing operations, inclusive of goodwill impairment of $25.8 million were approximately $47.4 million this year compared to approximately $27.5 million last year.
Excluding the goodwill impairment, operating expenses from continuing operations were $21.6 million for 2023 compared to $27.5 million last year. Whereas reflects the significant process we've made late in 2023 to reshape our cost structure for a better picture of the impact of our cost reductions. We note that the average monthly operating expense from continuing operations for Q4 2023 was approximately $1.1 million as compared to an average of $2 million for the previous nine months of 2023. Other noncash operating expense items related to continuing operations in 2023 were stock-based compensation and impairment of goodwill, which totaled approximately $30 million this year compared to approximately $3.1 million in the prior year by excluding these noncash charges, adjusted operating expense was approximately $17.9 million this year compared to approximately $24.3 million last year.
Our loss from discontinued operations for 2023 was approximately $10.9 million and $5.5 million in the prior year, which encompasses all the revenues and costs of late non-GAAP adjusted EBITDA loss from continuing operations was $15.5 million this year compared to $20.8 million last year, which reflects a 25.5% improvement in late February we executed a 50 to one reverse stock split, which under GAAP all share information has been recast. Shares used to calculate earnings per share were approximately $2.4 million.
This year versus approximately $2 million last year. So net loss from continuing operations was $41.9 million or $17.63 per share this year compared to $45.4 million or $22.95 per share last year. Our backlog of deferred revenue at the end of the quarter totaled approximately $4.7 million. Moving to the balance sheet, we closed the fourth quarter with $3.9 million in cash and $4.9 million in debt, which was down from the$ 9.7 million of debt at the end of the prior year. So with the historical numbers covered, I'm going to highlight other recent accomplishments. First, we reduced monthly cash burn by prudently restructuring operations.
Here are some examples compensation expense for retain key talent to support existing customers and initial growth projects, which resulted in reduced compensation related costs. So salaries, payroll taxes and benefits by approximately 55% at the end of 2023. Our total headcount was 25, and we're currently at 27 today rent expense during 2023, we negotiated the termination of three of our five existing office space leases. We expect 2024 monthly lease expense net of sublease income to approximately $50,000 a month. We continue to pursue the sublease or early termination of our office lease beyond compensation and facilities costs. Our Q4 rental rate for other expenses has decreased more than 50% compared to the beginning of 2023.
Secondly, a strong improvement in our balance sheet, beginning with a small equity raise in December, followed by others. In January, we were able to stabilize our financial position and fund our runway for the foreseeable future for some added context in early March, and we now have approximately $17 million of cash on hand and zero debt. Nearly $2 million of future lease obligations eliminated approximately $4 million of current liabilities pending, we settled a significant pending lawsuit, which was fully accrued in prior years and we have a clean capital stack consisting of just common stock. We will remain active with both financial conferences and investor meetings in our efforts to share our story and further strengthen our corporate profile in the capital markets.
The next major financial conference. We will be attending as the 36th Annual ROTH Conference on March 17th through the 19. We look forward to many one-on-one conversations and meetings with long-term minded institutional investors at the event and other financial conferences as opportunities present themselves. So with that, I will now turn the call back over to Mike for his discussion of our forward-looking strategy. Mike?

Mike Snavely

Thanks to right now that we have a solid foundation to work from here is how we plan to build the future for our shareholders. Our commitment to our shareholders is one of sober execution. What does this mean? Solid? Steady growth, careful stewardship of company assets, driving the core software business toward breakeven and then profitability and deployment of a portion of our capital against carefully considered opportunities that have a potential for outsized returns.
Our strategy in software software has always been the core of our company. We believe that our software assets and our partnerships provide us with the ability to deliver the benchmark solution for the mobile engagement of our customers, stakeholders and to continue to be recognized as an indispensable revenue generator for brands. This is the primary mission of our software business, which is focused on hospitality, health care and connected office environments.
Like we have in place with Gaylord Hotels, Phoenix Children's Hospital and Norfolk Southern's corporate campus to name a few examples in recent years as our software business has evolved from a professional services, software development model to SaaS, licensing our staff and become oversized in relation to the portfolio we have under management. We have right-sized that part of the business while preserving the institutional knowledge embodied in our leadership team.
Our goal for the next for few quarters is to deliver ever increasing results from the software business. And we believe that we can do so based on achievable revenue growth goals and delivery efficiencies. Since our last earnings call, we have added and launch new customers in Miami, Ally and Montreal. These hospitality customers joined a portfolio of existing customers that have consistently renewed and expanded their relationships with Phunware. Our solution is deemed indispensable by our customers to engage and monetize their guests, patients and employees the mobile applications and experiences we develop for our clients consistently win a industry accolades, underscoring their effectiveness and reliability.
Finally, we also consistently see the best indicator of customer satisfaction, referrals and positive references to their peers in the industry. We continue to enhance our platform by internally developing new capabilities. For example, artificial intelligence that identifies customer desires based on location activity and profile and services offers at the right time. However, we also believe that acquisitions and strategic partnerships will play a significant role in expanding our footprint in the markets we serve to that end, we are actively seeking relationships that align with and support our strategy of delivering a complete end to end solution for end user engagement that directly drives revenue for our customers on patent monetization.
We are committed to protecting our company's rights against any patent infringement that we can identify and to engaging in efforts for recovery of damages. We believe that our patent portfolio built up over the past 15 years covers some of the most fundamental methods of the way data is managed and distributed on the Internet and in mobile and we intend to aggressively identify and hold infringers to account. We've seen the first fruits of progress on this front, a jury in the US District Court in Los Angeles has found that US patent number eight nine eight nine seven one five, also known as the seven one five patent infringed by Netflix video streaming services. While we previously sold this patent to go TV streaming.
We retain a significant economic interest in all future enforcement licensing and other recoveries related to this patent, including damages from the Netflix case for more information on this action, including the current status of a motion for a new trial on damages, please see GO TV streaming LLC versus Netflix, Inc. filed in the US District Court for the Central District of California. Today, we have 16 other issued patents and eight pending. We are conducting an evaluation of our remaining patent portfolio and look to partner with one or more entities in the near future to assert our rights and to monetize some or all of these assets on digital assets, including fund point digital assets will also be part of our strategy moving ahead, given the expansion and broader acceptance of Bitcoin, Ethereum and other digital assets and the growth of related networks together with what we believe to be increasing regulatory certainty on digital assets.
We believe the time has never been better to refocus in this area separately. And as part of our software offerings, we have been a pioneer and innovator as a public company in the digital asset space. For example, we created and developed our own native tokens fund coin and fund token, and we created and launched the fund wallet application we have made tremendous progress on implementing our multifaceted digital assets related business by mid 2022, increasing regulatory uncertainty and unexpected events in the digital asset markets, coupled with changes in management forced us to put our digital assets business implementation on hold until now.
It will take us some time, but we are committed to building a successful multifaceted digital assets business with differentiated offerings. Today, we are confirming some initial steps for our multifaceted digital assets business strategy, number one, issuance of fund coins. We will finalize the structure of fund coin and its related ecosystem solidify the role of fund token within the ecosystem and complete our initial issuances of fund point at the earliest practicable opportunity. We are engaged daily in the work required to get this done, we may make some changes to fund coin in the ecosystem that we believe will benefit our digital asset holders and stakeholders.
Number two, we have built IP that will take our digital asset strategy well beyond the issuance of coins and tokens, for example, we have an issued U.S. patent one one eight two nine nine nine six described as hybrid organizational system for data management and tracking to cover certain elements embodied in fund wallet, including the ability to share consumer data for value. We have also conceptualized and applied for a patent on what we call the Global crypto Passport, which we believe will be an important method for connecting traditional financial institutions to the crypto ecosystem.
In summary, we believe that we have solved the majority of challenges facing the Company 2023 as in the past, and we are moving ahead unencumbered by debt with the right management team in place and with access to the capital and runway that will allow us to fulfill the mission I've just described. Our goal is to deliver results with sober and responsible execution in the interest of building long-term buy-and-hold shareholder value. I would like to open up the call now for questions through the operator. Operator, please go ahead.

Question and Answer Session

Operator

(Operator Instructions) Darren Aftahi, Roth MKM.

Darren Aftahi

Am I okay, Troy, thanks for taking questions. And good this year. This strategic focus going forward. If I could ask a couple, I guess, first wind, you think about the software as a service business. You guys have made inroads into the three kind of verticals you talked about, I guess now that you've sort of got through the heavy lifting done with restructuring the company. Where do you see the most opportunity in those three verticals on.
And then I guess my second question, as we think about like mix revenue going forward, how impactful is digital assets going to be on your 2024 P&L? Or is that going to be more of a long-term strategy?

Mike Snavely

Thanks, Darren. It's Mike, and thanks for the questions. So let me start with the first one, which is what verticals do you think are most promising within the software business, think of our software portfolio as a digital companion to an in-person experience. And so we've identified and we have traction in hospitality, which is, you know, people maximizing the value of the big investment they make and going to a resort property, let's say, number two in health care words of literally critical importance that they get to their appointments on time and are able to access the information they need it on that premises.
And then within the Connected Workspace for a workspace segment where it's important for employees to be able to access various services on complex corporate campuses. You can extrapolate that concept of digital companion to an in-person experience to lots of different things. So think about university campuses, think about arenas, think about we had an historic airport business, et cetera. So all that to say that we believe that we have the ability to deliver an end to end guest experience, specifically in hospitality because of some of the nuances and systems that are in place for some of those major resort properties.
There are several hundred really large resort properties around the world, and we're going to be super focused on that in the immediate term and more opportunistic on the other segments that we've identified relative to the impact of digital assets on the balance sheet or in the financials of the company for this year, we expect it's going to take a little bit of time to get this right. I'm personally very bullish on this idea of the global crypto Passport and in fact, I'll be at the ROTH Conference next week talking to investors and others, analysts like yourself on about what our thoughts are there.
Those thoughts are still crystallizing and coming together. But I think we're really onto something here specifically when it comes to connecting sort of legacy financial institutions to the crypto ecosystem, and we'll have a little bit more material that we can talk about. Then in terms of sharing our vision for that segment of the market.

Darren Aftahi

Great. And then just two more, if I may. On your sort of legacy that business has some channel partner relationships now that you've filled out head count, like how important is that to growth going forward? And then I know you talked about M&A being important in the go forward strategy, and I'm more curious is that a horizontal or more of a vertical endeavor?

Mike Snavely

Thanks. Sure. Well, we're still pretty young channel still pretty important to us. And as I said on the last earnings call, about 30% of our pipeline comes from channel partners. Those are typically going to be systems integrators and others who are proposing large complex technology solutions for new build new buildings or from potentially renovations of existing buildings, et cetera, that remains important.
On the M&A front. I think that will we're looking at targets that will potentially provide us with acceleration for feature function and integrations that will serve the hospitality and health care space.

Darren Aftahi

Great. Appreciate the color. Thanks, Mike.

Operator

Scott Buck, H.C. Wainwright.

Scott Buck

Good afternoon, guys. Thanks for taking my questions. Mike, I was hoping maybe you could expand a little bit more on that last question. I'm curious any any real changes to the way you're approaching sales in the in the and location platform versus maybe the last regime?

Mike Snavely

Yes. So based on where we are in terms of staffing size, et cetera, we're going to have to be really smart about creating distribution leverage. And so, you know, I brought in a couple of people who are arguing sort of tried and true in terms of their effectiveness in not only selling but also leading the sales function. We're going to be investing in demand generation and other traditional B2B marketing techniques to serve our direct salesforce.
In addition to that, and I'm personally going on the road and having discussions with some other ecosystem players specific to the hospitality segment to be clear are conducted one of those meetings last week. I've got another one coming up right after the ROTH Conference next week. And these are folks who have sales forces of dozens and hundreds of reps who can hypothetically take our solution to market as a complementary our product offering to the solutions that they provide, whether they're technology, hardware or otherwise. So I suppose the point is that our intention is not to hire a bunch of direct sales reps and, you know, hope that they go out and sell. It's going to be to carefully inorganically, cultivate and grow an internal sales force, feeding them with the appropriate marketing, but then really kind of exploring outside of the company to identify and leverage a distribution that's already in place with complementary solutions with them within the markets that we serve.

Scott Buck

Perfect. That's helpful. And then in terms of business cadence from here on, it sounds like all the noise is really in the past and from here on out, we should, you know, we really look at this as a fresh restart on the business.

Troy Reisner

Is that fair, but I'm going to ask George to answer that because I need to take a sip of water. But I think I think you're probably right. Yes.
Thanks, Mike. Scott, thanks for the question. And yes, well, we're looking at that as a restart. You know, when I joined back in June, we had thought it might be lifting and we've we've accomplished the vast majority of that. We've got our costs under control. We have a plan to breakeven. And one of the things we've been fighting for a while is the potential to add back the listening for trading under $1.2. Obviously, we did a reverse stock split and I can share with you guys that today we received a letter from NASDAQ that we were back in back in compliance.
We'll be filing an eight K on that here in the near future. So we've come out of this period of time with that cleanup, the cost structure, cleaning up the balance sheet and maintaining our liquidity options going forward. So yes, it's a new day, Scott.

Scott Buck

Very thanks for that, Troy. And I guess last one in terms of the current cost infrastructure, how much support does that give you as the revenue begins to ramp? I mean, is this are we at trough levels or is this something you can hang on to our revenue growth on a two or three times where we are today.

Troy Reisner

Yes. Good question, Scott. And now we're at we're early stages. I believe we're going to have to make some investment as we grow. I think that and investment probably starts to modest for a ramp at midyear and then we'll evaluate what the backlog looks like and invest accordingly. We're going to be, you know, conservatively aggressive, but we want to make sure that we're not getting too far in front of our revenue stream and get back into the situation where we're burning just too much cash.

Scott Buck

I appreciate that. Thanks for the time, guys.

Operator

Ed Woo, Ascendiant Capital.

Ed Woo

Yes. Congratulations on all the progress on the turnaround. My question is, what are you seeing out there in terms of the sales cycle in your business? I think you have reached a much better state of the company. Has that improved when you make your pitches to your central time?

Mike Snavely

Yes, it's starting to we're starting to see evidence of improvement. Let me speak to that a little bit. So part of being part of our strategy and really being relying upon in part an organic sales force and then the sort of the Yum. Third party distribution represented by partners, et cetera, is that those are very different kinds of sales cycles and different kinds of maturities. And so our job is to do a better job of identifying direct sales opportunities where we can. We are working pretty hard referral programs from existing happy satisfied, renewing customers. And I'll give you just one really quick anecdote.
So we recently launched a particular property under the Marriott umbrella on that implementation. We're really well the young, the General Manager of that property. So look, I'm really enjoying what I'm seeing here in terms of the app and the engagement it's driving, let me introduce you to my friend over here who runs another resort in a different part of the country and that sales cycle is maturing very, very rapidly. I think it's probably sort of in the 45 to 60 day close timeframe as distinct from some of the other beachhead accounts that may have taken many months to win.
So in addition to that, we've got a fair bit of what I'd characterize as incremental demand within our existing customer base, those should boil quicker as well. And so we're employing kind of an all of the above strategy, identifying direct deals within existing customers and their friends and family. So to speak. And while we are waiting for some of these deals that are coming through channel to mature on their own time line.

Ed Woo

Great. Well, thanks for the color, and I wish you guys a good luck.

Mike Snavely

Thank you.

Troy Reisner

Thank you.

Operator

Howard Halpern, Taglich Brothers.

Howard Halpern

Congratulations on all the hard work that you've accomplished so far. Could you I guess, provide some color on ideal deal size within within the different verticals? And are you looking at maybe initially maybe a smaller deal size that you can move forward with, you know, incremental growth with in are new customers?

Mike Snavely

Yes. So we're I'm actually kind of go in the opposite direction. Let me let me, let me tell you what I mean by that. So we're kind of rejiggering the way that we tell the story of value that we deliver to our customers. And so our goal. And I'm just I'm speaking specifically to hospitality. The economics in the healthcare space are a little bit different, and they're also different from their connected workspace. But as I mentioned, hospitality is going to be one of our primary focuses in the immediate term. We're really talking about this as a turning our digital companion to the in-person experience into a revenue-generating concierge type service. And what I mean by that is that it's essentially a Digital Companion sitting in the pocket of all the guests in such a way as to be able to allow them to transact. And we've got some good data from a couple of customers that tend to indicate that they're generating many hundreds of thousands of dollars per quarter. Through our application.
So we're going to lean into that. We're going to charge for the value we're delivering, and we're also going to be bundling in a deeper level of customer success into the relationship with these with these customers and such a ways to really allow them to extract more of that value without having to add staff on their side and we can do all of that without some kind of linear scaling. We can do that supported by artificial intelligence arm and various playbooks that we've built based on the best practices that are available or that we've identified through the partners that we have, the customers rather that we have that are achieving with the good results. So I think that our ticket is going to go up on as this sales strategy takes hold. But I think it's kind of early days. And I'd hate to say anything definitive until we have some more some more data to help us help you with your forecasting.

Howard Halpern

And can you talk to your I guess your engineering software teams have made develop a methodology for maybe quicker implementations than in the past? And how is that how does that relate to potential growth opportunities?

Troy Reisner

They sure have an effect on I must confess. I don't really know all the details because I'm really not a technical person But long story short on, we've identified some ways to really compress the timeframe and the level of effort required to implement a new solution and that has to do with some of the ways that we've updated our app framework and some of the ways that we have identified certain capabilities within the implementation workflows that allow us to ingest data in mass and otherwise use that kind of cascade through the app, distinct from some of the hand work that was being done before and we'll continue to focus on ways to decrease the time to market and decreased, frankly, the level of effort and cost associated with delivering these solutions.

Howard Halpern

Okay. Well, thanks. And keep up the great work you've extra.

Troy Reisner

Thank you, sir.

Operator

Thank you. That completes our Q&A session. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.