Phunware, Inc.

Good afternoon, ladies and gentlemen. Welcome to Fundware's third quarter 2022 investor conference call. Currently, all participants are on a listen-only mode. Joining me today are Alan S. Natowski, President Chief Executive Officer and Co-Founder, Randall Crowder, Chief Operating Officer, and Matt Owen, Chief Financial Officer. The format today will include prepared remarks by Alan, Matt, and Randall, followed by a question and answer session. As a reminder, today's discussion will include forward-looking statements. These forward-looking statements, including any such statement referring to the potential effects or impact of the COVID-19 pandemic, 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 gap-to-non-gap financial information is set forth in the earnings press release, which is available on the Investor Relations section of Fundware's website at investors.fundware.com. I further encourage you to visit investors.fundware.com to access not only the earnings press release, but also the current investor presentation, SEC filings, and additional collateral on Fundware. At this time, I'd like to turn things over to Fundware's President, Sir, please proceed.

Thank you very much, and welcome to our third quarter 2022 investor conference call. My last is Funware's president and CEO. As a reminder, Funware is a nearly 14-year-old technology company focused on the intersection of mobile, cloud, big data, and blockchain, with business-to-business, business-to-government, and business-to-consumer customers worldwide. Our core mission is to create a Funware ID for every human being on Earth that has a device touching a network, that is connected to their favorite brands, applications, and venues that just happen to run Funware software or intersect with our cloud-based infrastructure. On one side, we provide our business-to-business and business-to-government customers with everything they need to succeed on mobile, including the product solutions, data, and services for their digital transformation needs on Apple iOS and Google Android devices and applications. On the other side, We provide our business-to-consumer customers with the hardware systems, software, and cryptocurrency services needed for their engagement and incentivized participation in high-performance gaming, streaming, trading, cryptocurrency mining, and personal productivity computing. Central to these efforts is our enterprise cloud platform for mobile, called MAPS, or Multi-Screen as a Service, which is available for licensing under a SaaS business model over one- to five-year contract periods worldwide. and our Fund Token, Fund Coin, and Fund Verse loyalty and rewards cryptocurrency ecosystem for the physical and virtual world, which is facilitated transactionally with our Fund Wallet mobile applications for the Ethereum blockchain. The completion of Q3 constituted continued operational momentum for our business, as we further accelerated our mass platform vision and adoption across a number of key firms, including new product introduction, indirect channel expansion, digital asset expansion, and a more than 120% sequential gain in year-over-year revenue growth. In parallel, the conclusion of Q3 subsequently provided even more growth opportunities for our business as we further scaled our Light by Funware operational infrastructure for what we expect to be record Q4 hardware sales during the upcoming holiday sales season, all anchored by a balance sheet now including digital currency balances of more than 653 Bitcoin, 753 Ethereum, and DeFi positions valued in the aggregate at nearly $14 million at today's prices. In tandem, we expect full-year 2022 revenues to exceed $22.5 million, up roughly 225% year-over-year, while we also continue to expect that second half 2022 will represent a new second half record for reported revenues as a public company for its comparable period. Our CFO, Matt Aune, We'll break down these details and forecasts further in his section of the earnings broadcast. In terms of the current operating environment, our core business-to-business and business-to-government customers are continuing to return to their offices and facilities, remaining in a hybrid transition with regard to their employees and contractors safely returning back to work. In parallel, and consistent with what many other technology companies are seeing similarly, Operational headwinds remain against a backdrop of excessive inflation, elevated interest rates, ongoing geopolitical tensions, and a stubbornly recessionary macro economy. Nonetheless, we continue to expect that cities, states, and countries will continue opening on a broader basis throughout the balance of 2022, and that 2023 will look far more normal for in-office operations. Of particular note, and quite counter to some of these challenges, our business consumer customers continue to be active and fully engaged, demonstrating robust demand for both hardware and cryptocurrencies. As suggested previously, and again reiterated here, we are both excited and comforted by the dramatic increase in activity across all aspects of our product and solution offerings for mobile, big data, cryptocurrency, high-performance computing, and the cloud. Importantly, this activity encompasses all of our core growth engines rolling forward, including our mass cloud, our data-driven loyalty marketplace, our secure blockchain-enabled token, coin, wallet, and metaverse capabilities, and our high-performance computing systems for gaming, streaming, trading, cryptocurrency mining, and personal productivity. Last year was the genesis of a powerful transition in our company's history. As we shifted from a non-recurring, low-margin transaction business to a far stickier, more scalable, recurring and high margin SaaS licensing business for our mass platform. In addition to continued enterprise interest in our mass digital front door solution for healthcare, our mass smart workplace solution for corporations, and our mass residential solution for real estate properties, we accelerated conversations with customers from sectors that were hit hard by the pandemic, including the hospitality, real estate, and healthcare verticals. These activities resulted in many customer wins for our team, including TransSystem, MediaSequel, Miami-Dade County, Live Nation, the Federal Highway Administration, the Federal Rail Association, and our recently announced renewal and expansion contract with Parkview Health. In conjunction with growing our portfolio of direct customers like these, including a major international hospitality brand that we expect to announce formally in the next few weeks, We also further expanded our global footprint by amplifying our go-to-market strategy with core indirect sales and channel partners, now including Campaign Nucleus, Cisco Systems, Carrier, Presidio, CDW, Salto Systems, Axion Labs, Primus Tech, Cooper Lighting, Lutron, Verizon, Cox Business, Newcomen Boyd, Comfort, Contact.io, and HID Global, amongst others. We remain extremely excited about the post-launch scaling of FundWallet and our blockchain ecosystem powered by FundCoin and FundToken, including the recent addition of FundVerse for the virtual world to accompany our existing efforts already well underway for the physical world. We are continuing to aggressively scale and monetize this part of our business and look forward to the accelerated global adoption of both our blockchain-enabled mass customer data platforms and our mass mobile loyalty ecosystem. During Q3, these important activities included the trading expansion of fund token on decentralized exchange Uniswap and the pending trading commencement of FundCoin on centralized exchange Securitize. As stated above, we are extremely excited to announce today more than 120% sequential revenue growth year over year. Additionally, and in parallel, we are announcing forward revenue guidance for 2022 of up roughly 225% year-over-year, or $22.5 million, while also reaffirming our expectation that second half 2022 will represent a new second half record for reported revenues as a public company for its comparable period. As always, we will continue our core go-to-market strategy centered on direct and indirect agreements and contracts with Fortune 500 customers, especially in the Fortune 100 size range. and governments ranging from local and county to state and federal. In parallel, we will also continue to dramatically expand our direct-to-consumer channel for business-to-consumer engagement across both our high-performance computing and cryptocurrency offerings to consumers. We are extremely excited by a number of developments that have occurred over the first three quarters and even more excited by what we see coming in the coming quarters and years ahead. First, we continue adding new customer wins to our existing mass bookings backlog and deferred revenue totals for future revenue recognition over one to five-year contract periods that will ultimately provide SaaS revenue recognition over the coming 12 to 60 months rolling forward. Second, we continue expanding our installed base of funder IDs on mass to more than 15 billion devices worldwide, including mass platform scalability capable of supporting up to 5 billion transactions per day 500,000 transactions per second, and 1 billion unique devices per month. With more than one petabyte of data, typically growing at more than five terabytes per day when operating at scale, our mass platform now provides a robust customer data platform inclusive of both a detailed data ontology and a comprehensive knowledge graph for one-to-one interactions and engagement. And third, we commercially launch and continue scaling our FunWallet mobile application on Apple iOS and Google Android in conjunction with our mass blockchain ecosystem, all powered by our FundCoin and FundToken digital assets, now including FundVerse for the virtual world. While FundCoin security tokens only appear on our balance sheet due to their status as a regulated security, FundToken utility tokens continue flowing transactionally through our P&L as net new and virtually 100% gross margin revenue. As a reminder, and during the comparable period in 2021, We did not have the Light by Funware hardware business at all, and had only just launched the mass little team rewards ecosystem anchored by FunToken and FunCoin. However, fast-forwarding to today, we now have both lines of business active and are continuing to scale them productively, including the first half 2022 edition of the FunWallet mobile application portfolio on Apple iOS and Google Android and its accompanying virtual world metaverse, which we have branded and launched as Fundverse. At this time, our CFO, Matt Aune, will go deeper into our third quarter financial performance as reported, including our strong sequential revenue growth year over year and our expectations for the remainder of the fiscal year. Matt, please go ahead.

Thanks, Alan, and good afternoon, everyone. I'd like to thank you all for joining us today for a review of our third quarter 2022 financial performance and our progress on key strategic initiatives. For clarity, I'll be discussing GAAP financial measures unless otherwise specifically noted. Our press release, 8K, and website provide a reconciliation of all GAAP to non-GAAP financial results. Net revenues for the third quarter 2022 totaled 4.8 million, which represents 120% growth year over year. Our platform revenue represented 27% of net revenues, or 1.3 million. Our hardware revenue, or Lite by Funware, represented 73% of net revenues, totaling $3.5 million. Gross margin was 16.7% compared to 52.5% in Q3 of last year. On a non-GAAP adjusted basis, gross margin was 17.9% compared to 68.8% in Q3 of last year. Platform gross margin was 46.5% compared to 52.5% last year. As I've mentioned previously, Light by Funware has a different margin profile as a computer hardware business than our higher margin platform business. Light by Funware gross margin was 6%, which includes 131,000 write-down of inventory related to strategic speculative purchases made in the middle of the worldwide chip shortage when certain CPUs and GPUs were in short supply and at much higher prices than they are today. We still expect to turn this inventory. However, it will be sold at current market prices. Total operating expense was $8.7 million, up from $5.2 million in the same quarter last year. Other non-cash operating expense items were stock-based compensation and amortization of intangibles, making up a combined $1 million this year, compared to $1.2 million in the prior year. By excluding these one-time and non-cash charges, adjusted operating expense was $7.7 million, compared to $4 million last year. As I mentioned last quarter, between the Light by FunWare acquisition and the rebuilding of portions of our expense structure coming out of COVID, the year-over-year operating expense increase was expected. We are confident we can scale the business with our existing people and facilities while keeping our cost structure at or below current run rates. Non-GAAP adjusted EBITDA loss was $6.7 million compared to $2.5 million last year. Net loss was $8 million or $0.08 a share compared to $0.4 million net income or $0.01 per share last year. Backlog and deferred revenue at the end of the quarter totaled $7.9 million, up from $6.1 million the same quarter last year. As I mentioned on a previous call, we expected our backlog to grow coming into the back half of this year. Moving forward, we have every intention to grow this number as it provides predictability with our revenues and future billings. Moving to the balance sheet, we closed the quarter with $8.5 million in cash and $12.7 million in debt. As I mentioned on our last call, we reached an agreement with our partner, Streeterville Capital, increasing our borrowings to roughly $12 million so we can ensure we have enough operating cash for the year. We currently hold just over 653 Bitcoin and 753 ETH with an aggregate value of approximately $13 million based on today's prices. In addition, we hold just under $1 million of decentralized finance DeFi holdings, which currently yield roughly 20% annually. In closing, as we move toward the end of 2022, we are encouraged with our continued record top-line growth in the face of inflation and a slower economy. As we look toward the new year, we have a renewed focus to rigorously prioritize our investments to ensure success in this unpredictable economy. We are committed to continuing to build a strong revenue base while improving overall gross margins through both organic and inorganic opportunities. 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. The next major financial conferences we will be attending are the Roth 11th Annual Technology Event on November 16th, a benchmark 11th Annual Discovery One-on-One Investor Conference on December 1st, and a UBS TMT Conference on December 5th through the 7th. We look forward to many one-on-one conversations and meetings with high-class institutional investors at each event as opportunities present themselves. With that, I'd like to turn the call over to Randall.

Thanks, Matt. Last year, people spent a third of their waking hours on their phones, according to the App Annie Stata Mobile 2022 reports. That's almost five hours per day. Statista estimates that an astounding 90% of the global internet population uses a mobile device to go online. At Funware, we deploy cutting edge technology to help any brand in any industry better engage, manage, and monetize their customers in a mobile first world that is quickly becoming mobile only. We tech enable contextual engagement by leveraging data and unifying disparate third party solutions to deliver the right content in the right place to the right person at the right time. By automating engagement, we help our customers not only make more money, save more money, or get more out of their money, but also delight their stakeholders by enhancing real-world experiences. To achieve this, we continue to focus our efforts around five core objectives. Objective one. improving the features and scalability of MaaS to not only drive adoption and shorten our sales cycle, but also enhance our margin profile. From a platform standpoint, we are hard at work productizing many of the internal tools we use to deliver our amazing mobile solutions so we can offer our customers more self-service features and functionality. One of the key problems we're working to solve is that organizations have static data and legacy systems and offer and leverage third-party solutions that are not designed with interoperability in mind. Many of the customers in our pipeline are looking for better ways to dynamically access and deliver relevant content based on context to inform and enhance engagement through their mobile applications. Our solution is middleware that unifies and leverages disparate data sets and third-party solutions to drive interoperability. Now we are working on a rules engine to auto-populate audience segments by attribute, which can then be assigned to targeted campaigns based on context. For example, our platform will deliver a free drink coupon to a veteran in the lobby when she arrives at least an hour before check-in just as easily as it will deliver an alert to a nurse when he is in proximity to a recovery room with a patient who is a fall risk. This is not that dissimilar from the systems I use during combat to ensure leaders had a comprehensive understanding of the battlefield. The Common Operational Picture, or COP, is a command and control resource that provides situational awareness, enabling users to make accurate, informed decisions. Data is integrated from multiple sources to support any and all functions of an appropriate response using one spatial data platform. This is exactly the kind of capability we can offer enterprises so they also gain a tactical advantage. In addition to our continued product enhancements around data and interoperability, we are also working to expand our location based services or LBS capabilities. Our patented mass LBS software and beacon management solution provide native mobile first capabilities that are ADA compliant and deliver proximity sub one second real time blue dot indoor positioning, navigation and wayfinding functionality across any campus or facility. However, the cost of beacons can be prohibited. So we have begun exploring not only wholesale agreements to bring down the cost of each beacon, but also newer technology like geomagnetic indoor positioning to eliminate the need for so many beacons altogether. Our hybrid LBS solution should improve our close rates as well as our margins. Objective two, scaling revenue as well as activating indirect channels by ensuring our partners have the training, collateral, and proper incentive structures in place to be successful. As of this quarter, our most active industries in our software pipeline remain healthcare, hospitality, and sports and entertainment. While average deal terms are three to five years, we've seen our average deal size for new proposals continue to increase. For example, healthcare represents half of our pipeline with an average deal size of $600,000 since our digital front door is the closest deployment we have to true SaaS. Hospitality represents 25% of our pipeline with an average deal size of over $1.1 million and is getting a lot more attention now that our smart hospitality solution is live at Atlantis in the Bahamas. In fact, we're excited to announce our smart hospitality solution is being licensed by the major hospitality brand we alluded to during last earnings call and expect to be able to formally announce details of that engagement this month. Our initial implementation was a resounding success and the full rollout of that solution across multiple properties requires no additional custom code. This kind of SaaS deployment is a testament to our product engineering teams who have been working tirelessly to help us more efficiently scale our platform. As we look ahead to 2023, we are excited to have these well-known brands as reference customers, but we are also working to refine our collateral and positioning to improve our sales motion and reduce our sales cycle by simplifying messaging, showcasing interoperability, selling ROI, and streamlining pricing. For our data-enriched media opportunities, we continue to focus on direct engagements. Our most active industries are retail, government, and healthcare, but we're seeing strong growth in food and beverage, travel, and sports entertainment. That said, retail and healthcare represent approximately half of our pipeline, with an average deal size of $40,000 and $120,000, respectively. Blended, our platform gross margin was 46.5% in Q3, but it's important to keep in mind that the initial implementation and various integrations require more work in the first year, while subsequent years require very little. For reference, a typical software deal right now is 75% gross margin over the life of the deal. One important area of focus for us to improve our margin profile is improving our ability to sell through indirect channels. Led by two recent hires as well as an outstanding consulting team, we've been working hard to not only better support our existing partners, but also onboard new ones. We currently have 37 new partners in development and more than 22 new leads sourced from our partners during the quarter. We've also begun holding partner webinars with customers like the one we held with Cox Communications and Phoenix Children's Hospital with over 500 registrants. To support our partners, we also provide comprehensive case studies, articles, e-books, and additional training opportunities. The Funware Phenom Certified Developer Program is also available to provide on-demand courses and live training sessions remotely to learn more about MAS and how it helps brands better execute their digital strategy and establish a true mobile presence. In parallel, we provide full MAS documentation and software portals via the Funware Documentation Portal and GitHub, respectively. Objective three, launching a compliant blockchain ecosystem to better incentivize and authenticate consumer engagement. To be frank, crypto is a house of cards built on hubris, fraud, and confusion. Yet blockchain remains one of the greatest innovations the global economy has seen since the Medici's commercialized double-entry accounting. Just like the dot-com boom when entrepreneurs either cashed out or flamed out, Market corrections like the one we're experiencing now are important because what emerges from the ashes of failure are companies like Funware that are accountable to their shareholders and will usher in lasting change that realizes blockchain's true potential. Just like Bitcoin proved two parties could transact in a trustless manner without an intermediary like a bank, brands and consumers do not need data oligarchs in the middle who profit from the exploitation of consumer data without consent. A decentralized data economy which Funware is helping to create, will put consumers in charge of their data and enable brands to efficiently reach the consumers who are most willing to pay attention. However, the regulatory landscape does not support most of the utility tokens and perhaps even many of the NFT projects that have been deployed over the past few years. During the quarter, we completed an exhaustive review of the SEC's guidance to date, as well as some of the enforcement actions they have taken recently. While we still expect FunToken to play a role, we will be focusing the majority of our product and commercialization efforts on FundCoin going forward. FundCoin is not just a security token. FundCoin will be a compliant utility token because it's a security. Looking ahead, we are well-positioned to commercialize the world's first truly decentralized data economy with the robust infrastructure required to support an Oracle network that bridges Web3 applications to Web2 data with Litebuy Fundware, as well as a persistent mobile-first connection to consumers through FundWallet which is available on both Apple iOS and Google Android. As an extension of our mass platform, we are working on regular product updates, but we are excited to announce during the quarter the release of our location-based marketing functionality inside of FundWallet that will enable consumers to interact with brands in the real world. We are also working with Securitize to finalize everything we will need for the compliant official launch of FundCoin for trading. We understand it has taken longer than expected, but we are working to ensure the long-term health of the ecosystem we've committed to building. In parallel, we are also preparing to file a Reg A for FundCoin to enable future purchases and issuances. Objective four, ramping sales and improving margins of Lite by Fundware by streamlining operations and being more disciplined with our marketing efforts. During the pandemic, Lite was able to take advantage of CPAs below $50, but we have seen CPAs north of 300 since. which drove revenue, but also expenses. Going forward, we will not drive revenue at any cost. Starting in Q4, we are now focused on driving profitability so we can scale responsibly. We believe we can achieve this at a CPA of approximately $120 and have begun testing our new strategy with marketing campaigns for Black Friday, which are currently ongoing. In the first week, the team has sold over $400,000 and exciting new influencer integrations are going live over the next few weeks to broaden our reach during this holiday season. Our new facility near Dell headquarters in Austin has begun to ramp shipments to accommodate this influx of new sales, but we believe we'll be able to scale to almost 4,000 shipments a month and could achieve up to $75 million in revenue before we'd need to consider more space. In addition, our new ERP system will help us improve margins going forward as we put many of the one-time costs of moving to Austin behind us. We are also looking to add additional product lines, such as traditional PCs, to give us a larger target market while still optimizing for profitability. Objective five, engaging more investors with a focus on institutions to drive awareness, volume, and stronger price appreciation. Obviously, there's a lot of excitement in the market about fundware recently. In fact, our daily volume on Monday was 20 times our daily average. Somewhere to last year around this time when our volume nearly reached 650 million shares, a lot of people are taking notice. We will continue to work closely with Gateway, Roth Capital, and HC Wainwright to attend conferences and participate in non-deal roadshows to share the Funware story more broadly. We have also been given great opportunities to engage new shareholders through partnerships with Beretto Pacific and working closely with both John Najarian and Mark Lopresti at Moneta Advisors. In closing, I want to personally thank all of Funware's employees who are our single greatest competitive advantage. Their faith in each other and our vision is inspiring. As of the end of the quarter, we have 113 amazing employees with the majority of them residing in California and Texas. As we look ahead to the remainder of the year and into 2023, I'm excited about what we will be able to achieve as we focus on 10 operational goals that will be foundational to our success. Foster teamwork and minimize distractions. be more disciplined in the allocation of resources, align resources with core competencies, focus on ideal customers and partners, update positioning and marketing to better sell our core value proposition, productize internal tools, identify inorganic targets to accelerate commercialization of key capabilities, launch fund coin, reduce cash burn, minimize dilution. For closing remarks, I'll now turn things back over to Alan.

Thanks, Randall. As highlighted throughout today's call, we are all extremely excited by the ongoing scaling of our mass blockchain ecosystem and the high-performance computing systems being shipped to consumers via Light by Funware. What it means to me is that our decade-plus of mass platform building across mobile, cloud, and big data, accompanied by our years of community engagement in blockchain and cryptocurrencies, have resulted in the culmination and convergence of massive global addressable markets and trends that can continue to act as strong wind at our backs to further accelerate our continued growth. We expect this ecosystem to complement and supplement our core mass offerings as we offer our enterprise customers additional capabilities to identify, engage, and incent their target audiences. While many corporations and individuals are newly familiar with blockchain and cryptocurrencies, Both Funware and our executives have a long and distinguished history within the global digital asset community. As such, we continue to expect to be a trusted bridge for Fortune 500 corporations and governments looking to leverage blockchain independent of the recent macro noise and market pullback associated with all global cryptocurrencies. Please look for additional announcements in the coming weeks and months ahead as we continue to enable consumers to not only regain control of their data with Funcoin, but also to reward them for their engagement with FunTokens. which can be purchased online with US dollars, Bitcoin, and Ethereum at buy.fundtoken.com. In parallel, and as we would again reiterate here, we intend to complement and supplement our core organic growth activities through direct and indirect channels worldwide with opportunistic inorganic mergers and acquisitions. Importantly, and as we have done previously, we expect to focus our merger and acquisition activity on targets that are operating profitably and would represent accretive deals in areas that will provide more customers, more partnerships, and more distribution for our mass platform and cryptocurrency ecosystem, especially in international markets including Europe, Asia, and South America. Importantly, we expect to maintain a laser focus on our core operating and financial model, which includes strong top-line revenue growth of 225% or more for full year 2022, all while consistently working towards cash neutrality from operations at scale. In parallel, we also expect to continue leveraging our balance sheet where possible to amplify our corporate treasury activities as a strategic asset for the company, including our Bitcoin, Ethereum, and decentralized finance positions in order to generate additional financial returns for our overall operations and results. Finally, today marks my final public earnings call with Funware. as I transition at year-end from the company's co-founder, president, and CEO operationally to the company's co-founder, advisor, and largest evangelist and fan strategically. During calendar year 2023, I will be spending my time and focus advising Funware and assisting its leadership team and board wherever and whenever needed, both internally and externally. It has been a great honor and privilege to have started Funware nearly 14 years ago with Luan Dang and Alan Cain. as nothing more than a large idea, backstopped by an even larger vision, to then successfully fund and scale it privately for a decade, to then take it public on NASDAQ to trade as fund ever since. Fundware has felt like raising a child to me over all these years, including all of its inherent ups and downs, growth, maturation, and evolution that you might expect along the way. They say that it truly takes a village to raise a child, And in my heart of hearts, I know that our proverbial village has been all of you, our global Sunware family, who have supported us tirelessly along the way. With that, and in conjunction with a sincere thank you from me, Luan, Alan, and everyone else for your ongoing interest and support in all that we do worldwide on your behalf, I would like to now open up the call for questions through the operator. Operator, go ahead, please.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while we poll for questions. Your first question is coming from Darren Omtai from Roth Capital. Your line is live.

Hi, thanks for taking my question. This is Austin for Darren. First question, I'm just curious if you can maybe go into and discuss some of the dynamics of, you know, improved margin profiles or how indirect partners could improve kind of the margin profile, you know, as you start selling through those channels.

Yeah, let me start with that, and then I'll hand over for additional commentary from Matt and Randall. Importantly, when you break out different parts of the business, on the software side, obviously, we have very high gross margins, 75%, 80%. When we even bundle in the services, as Randall said, the initial work that we end up doing as time passes over years two, three, four, and five in a lot of these deals, you see the average gross margin just expand because we don't have to do anything in outer years once the applications get deployed. When you separate out the software side, you jump into the application transaction part. We typically see 70% to 75% gross margin. The real issue there is we just have to scale the size of that business so that instead of it being $650,000, $700,000 per quarter of the business, we just get more heads tied to more campaign budget tied to campaigns larger numbers which help out the margin. The other big part is obviously with Light by Sunware. First thing was to buy the business. Second thing was to consolidate its private company reporting in the public. Third was to migrate it from Illinois to Austin. Fourth was to get in a bigger facility that could scale up, as Randall said, can support up to 75 plus million in scale before we'd need more of a facility. Next part after that was deploying an inventory management system and a whole bunch of things that actually weren't in place before. And then separately was to set up procurement and supplier relationships to have more scale in economies with bulk buying discounts with a big focus on about $120 customer acquisition cost. So all those elements combined are really what get into the operating leverage as it relates to those three core areas of the business, And then to your point about selling through indirect channels and partnerships, that gets really important for us where we get pre-embedded in a product like Carrier and allowing that product to then expand to be able to automatically go out with each purchase that their distribution channels actually have. And the more of these partners that we set up, the faster that we expect to see not only the revenues grow, but also the margins that go with them. Let me see if Matt or Randall want to make any comments for that.

I think that was pretty thorough. I think the only thing I would add is, you know, what people need to understand is, you know, we're not, you know, the world is consumed by point solutions. You know, every entrepreneur gets told to be laser focused and they go out and build one very specific code base for one very specific function and they can sell that.

Every time we talk to a customer, you know, they're inundated with a bunch of point solutions. And so for us, the value of working with indirect channels is they already have that customer touch point.

So we talk about Norfolk Southern a lot. Even during the pandemic, we launched this amazing smart workplace solution of the future.

That partnership with Newcomb & Boyd is important. When you think about a consulting firm or a systems integrator, they're thinking holistically about the entire solution that one of these venues is going to require in order to drive digital transformation forward. Mobile is so important because it's going to present itself like a mobile application, but it's got to consider all of these other point solutions. And so for us, You know, when we think about indirect channels, that's what's taken so long. I mean, these are very complex ecosystems with a lot of competing third-party solutions and disparate data sets. And so the more we can get embedded either integrating our actual code into somebody else's solution or white labeling our stuff like we did with Cox or just partnering with these consulting firms who they hate to be exclusive. You know, they've got to kind of remain, you know, unbiased. but you want to be their first call like look you know i've got a customer they've got a problem you know they need a mobile strategy and you know we're going to call funware first because they deliver and so as we begin to get some of these relationships in and as we begin to kind of drive some of these you know sales motions forward you know it's a big process it's fuel reg portals it's collateral it's training it's dealing with vars but once you get them going you know, they can sell, we can support, and then we can start realizing that 75% gross margin across all our deals rather than, you know, the lower margin stuff where we're still kind of carrying most of the loads when we're selling direct.

Got it. That's helpful. And I guess just on the same topic, I just kind of have a follow-up for that. You know, Randall, you've mentioned a few times just the length of time it typically takes to get some of these direct deals integrated and kind of up and running. As these new leads come in from these indirect partnerships, does that come with it like any faster integration times? I'm just curious if that dynamic changes at all, if it's indirect versus direct time to get up and running with. you know, the final customer.

Yeah, it depends on what it is. You know, like with Carrier, we're actually integrating our code into their solution.

So you can imagine integrating our technology into a multi-billion dollar platform. You know, that's going to come with a lot of, you know, building consensus, getting approvals and things of that nature. You know, with other things where it's like we're just kind of white labeling stuff, it's a lot easier because they're kind of selling it under, you know, their own, you know, Cox Pro site, for example, is going after clinician experience and healthcare, but using a lot of our code to kind of get, you know, so they don't have to start from zero, if you will. So that's really fast. That's kind of deal by deal, customer by customer. But I think maybe more to your question is just kind of the maturation of our own platform, you know, with this kind of hospitality brand we've been alluding to. As we roll that out, that's no code. That's ready to go. And so the sales cycle was actually shorter than, for example, like Atlantis. And then the actual rollout implementation was a lot shorter. So you're talking a month, kind of two months, if you will, whereas Atlantis, it was more like six months. And so we're getting better and better, not only about truncating that sales cycle, but also truncating the actual time it takes to implement. But If you're talking healthcare or hospitality for us right now, those are our leading industries. We can get, you know, a full feature rich mobile application out the door. And we're talking weeks. Usually the biggest bottleneck is Apple and Google just approving things. And then, you know, if our customers want any specific integrations, we've got over 130 of those integrations that we're just pulling off the shelf. That's a huge competitive advantage, but it also speeds up the process. So, you know, we're getting longer and longer contract terms. and we're getting faster and faster at getting those things out the door. So we're really able to show some great reference customers about how our platform is transitioning to more like a SaaS deployment.

Got it. Super helpful. I appreciate you taking my questions. Thanks, Austin.

Thank you. Your next question is coming from Ed Wu from Ascendient Capital. Your line is live.

Yeah, Alan, I want to say it was great working with you, and I wish you best of luck in the future. My question is, you know, as there are beginning to be more macro concerns, especially with, you know, IT firms, what is your outlook into 2023 in terms of sales cycles and, you know, IT budgets?

Yeah, great question, and thank you very much for the kind comments. I won't be going too far away, but I do appreciate all the kind words. It's been great meeting with many of you guys and working together over all this time. I would say when I look at the macro economy, between now and the end of 2023, I don't really see a massive change in inflation that we're going to get huge relief. I don't really see interest rates magically reversing course. Clearly, we're already been in a recession, might even be stagflation when you combine negative GDP constructs that we had overlaid with high interest rates and inflation. So I think what we've seen across everything is, as Randall alluded, one part of our business is what used to take us six to 12 month cycles. A lot of times we see those down at three to six month cycles. for certain types of vertical solutions, which are more off the shelf and taking advantage of all these integrations and things we've had. In reverse, when you're getting into much bigger deployments, much more custom, you've seen that traditional six to 12-month sales cycle. It doesn't necessarily have to do with the education process or sitting down and walking through what different products and solutions can do for customers. Most of it has to do, are they back at the office yet? how many different functional areas are involved in the decision-making when it's so strategic. And more importantly, because so many of the customers out there, especially businesses are very concerned that we're in a difficult market economy, macro economy, and they're just deferring things. So we have seen, you know, a few deals in our pipeline that actually shifted out into Q1 where they want to start focusing on a 2023 budget. for their fiscal year and calendar year of 23 instead of 22. In a few cases, we're seeing people that are trying to accelerate the use of their 2022 budget before they finalize their Q4 planning. So I would say across just IT budgets in general, I think everything mission critical is getting deployed. Anything that is touching revenue that's going to enhance top line for companies or is going to reduce cost or is going to expand margin or customer satisfaction, we're seeing people invest. As we've been talking about, we'll get very formal on announcing the names and the details behind this big hospitality deployment we talk about. First property is already up and running. It's doing extremely well. There's multiple properties behind that and then multiple brands behind that. And really biting into those apples up front and doing that work and getting it right has been instrumental in what we're seeing going forward because whether the economy is difficult or not, certain customers are saying, hey, if it expands revenue, if it reduces cost, it expands margin, or it helps us in any way, whether healthcare with patient satisfaction scores or whether it's hospitality where it's getting more yield per customer per day by having more delightful experiences on site, all those things are going to be key Because once you have the payback and ROI lockdown, the deployment stuff sort of takes care of itself. And with the right payback and ROI, people find the budget.

Great. Well, thanks for answering my questions. And I, again, wish you guys all good luck. Thank you. Thank you.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star then one on your phone at this time. Your next question is coming from Howard Halpern from Taglitz Brothers. Your line is live.

Good afternoon, guys.

Hey, Howard. How are you doing?

In terms of the acquisition landscape out there, what kind of deal flow are you seeing and what are you seeing in terms of multiples out there, especially since you're looking for... you know, potential acquisitions outside the U.S.?

Yeah, I think that's a great question. And what we've seen is, you know, if I was going to use a joking analogy in the U.S., we like to say kind of we suck less, so to speak. You're seeing lots of fiat currencies around the world that are collapsing into U.S. dollars. So the dollars have been very strong this year, and a lot of other currencies have been weak. As a result of that, if you get into Europe, South America, Asia, what you often start finding is that if things are difficult on Wall Street with NASDAQ and New York Stock Exchange listed companies, it's even worse for publicly traded companies that are microcap, small cap all over the world in their local exchanges and markets, especially if their currency is under a lot of pressure because it's not U.S. dollars. So as a result of that, what we've found is we've done screens and looked all over the world because it's a lot easier to probably find an accretive acquisition to be able to tuck in. And we're seeing stuff that ranges from $50 million on the low side of revenue all the way up to $150 or $200 million in revenue. And you're seeing often market caps that might be kind of in the $40 to $80 million market cap range. Um, and many of those are coming across with 10, $15 million worth of EBITDA to go with it. So obviously there's a lot of work you have to go in and say, is this the right fit? Um, what's the nature of what the motivations are for selling and teams that want to stay or not stay. Um, and then there's a lot of sort of recognizing the harsh realities of what's happening in the economy worldwide, especially in local markets, not based on us dollars. which is are they going to try to wait for a recovery or do they see an advantage in being able to do deals, get some arbitrage, if you want to call on the multiples in the U.S. market, and then as the economy is getting better and we get out of recession and back to growth, then you can actually have everybody benefit from that uptick much stronger than what's likely to happen if they wait in foreign markets. So I would say that the good news is there's lots of opportunities, lots of conversation. I would say this time of year, it's pretty difficult to get things done through the end of the year and the holiday and everybody's planning. I expect in the first half of next year that all of that would accelerate, but I do still see that there's arbitrage between international and domestic. And for us, it's a matter of can we find customers? Can we find distribution? And can we find installed base? We don't really need technology. That's not really a motivator for us for buying. It's much more about distribution, customers, and expanding our footprint for the platform.

Okay. That's good to know. And then just one last one about what, I guess, this is more like for the first half of next year, what What type of margin profile for white do you hope to achieve by the end of the first half of next year?

Yeah, I can take that one. This is Matt. Yeah. So I think we've said before, we're, you know, we were targeting that business to be in, you know, kind of the 20 plus percent gross margin profile. So it's like we've said, it's not going to happen overnight. Um, we feel like we are making a lot of progress. with the margin at light, but it's also a situation where we move into a much bigger facility. We're getting things up and running. We've done a great job over the last couple months getting in place new systems and procedures at the new facility. So for us, if we're in the first half of the year, ending the first half of next year, and we're up in the 20% range, I think we're going to be happy. And then we're going to see if we can chip away and get closer to 30% as we continue to the end of next year.

Okay, that sounds good. Well, keep up the good work, guys. Thanks, Howard. Thanks, Howard.

Thank you. That concludes our Q&A session. I will now hand the conference back to Alan Itowski, President, CEO, and Co-Founder of Funware, for closing remarks. Please go ahead.

Thanks. In conclusion today, I just wanted to say how much I appreciate, value all of your interest and engagement with our company. Obviously, we've got a nice footprint headquarters here in Austin. We've got both coasts down in South Florida and Southern California. And we're very much looking forward to continuing to scale. We've gotten through the pandemic piece. Now, domestically and abroad, we want to start really stepping on the accelerator. And mostly today, what I wanted to do is just to say thank you, not only to the entire employee base of Funware who tirelessly is working for everybody here on the call and shareholders around the world, but also just for everybody that has been customers, partners, and other stakeholders with us along this ride. While I'll be formally transitioning out myself, I'll be remaining in touch with Funware at the beck and call of the board and team as needed, and we'll be looking forward to continue scaling into the future. As we always do, we like to really say how much we appreciate and value Funware family worldwide, leading into our annual general meeting, which will formalize and get completed tomorrow. I had the great pleasure of talking to shareholders on a worldwide basis, including some net new retail investors that we found in India with large Funware holdings that were interested in knowing a lot more about our business. I know Randall, Matt, myself really value all those engagements, all those conversations. It also helps us to understand where there's problems. We found shareholders that weren't getting proxy materials in part of the Nordic countries, other places in Asia where they weren't getting all the proxy materials because of the nature of how the brokerage relationships work between the United States and the rest of the world. So we're going to be actively following up with our shareholder base, trying to encourage people to get on the NOBU list, which is a list of more of your detailed information so that you as shareholders can make sure that you receive all of our information for things like annual general meetings, and also so we know how to reach you if there might be some things that haven't happened that we'd like you to participate with from routine things like meetings or other special events that may happen tied to acquisitions or anything in between. So in conclusion, and again, we mentioned Luan Dang earlier, Alan Kane earlier. These are three of us really enjoyed founding the company, scaling it, getting it public. And I'm even more excited about the next chapter, the business. So with that, I'll call it a good day. And finally, and most importantly, on behalf of several of us here that are all ex-military, have an amazing Veterans Day tomorrow. Remember what it's all about. I know we're going to enjoy a fun war holiday tomorrow for Veterans Day minus the annual meeting, and we'll be focused on really celebrating all the great brothers and sisters we've had around the world dealing with military service. So for those of you who have served, thank you. For those of you who are shareholders, thank you for being part of our family. And with that, we'll close things out for the day. Much appreciated.

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.