Good afternoon, ladies and gentlemen. Welcome to Phunware's Third Quarter 2022 Investor Conference Call. Currently, all participants are in a listen-only mode. Joining me today are Alan S. Knitowski, President, Chief Executive Officer and Co-Founder; Randall Crowder, Chief Operating Officer; and Matt Aune, 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 statements 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 GAAP to non-GAAP financial information is set forth in the earnings press release, which is available on the Investor Relations section of Phunware's website at investors.phunware.com. I further encourage you to visit investors.phunware.com to access not only the earnings press release, but also the current investor presentation, SEC filings, and additional collateral on Phunware. At this time, I would like to turn things over to Phunware's President, CEO, and Co-Founder, Alan Knitowski. Sir, please proceed.

Thank you very much. And welcome to our third quarter 2022 investor conference call. My last as Phunware’s President and CEO. As a reminder, Phunware 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 Phunware 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 Phunware 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 products, 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 MaaS 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 PhunToken and PhunCoin and PhunVerse loyalty and rewards cryptocurrency ecosystem for the fiscal and virtual world, which is facilitated transactionally with our PhunWallet, mobile applications for the Ethereum blockchain. The completion of Q3 constituted continued operational momentum for our business as we further accelerated our MaaS platform vision and adoption across the number of key firms, including new product introduction, in-direct 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…

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, 8-K, 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 Lyte by Phunware represented 73% of net revenue 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, Lyte by Phunware has a different margin profile as a computer hardware business than our higher margin platform business. Lyte by Phunware gross margin was 6%, which includes a 131,000 breakdown of inventory related to strategic speculative purchases made in the middle of the world-wide chip shortage on certain CPUs and GPUs were in short supply and at much prices then 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 $1.0 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 Lyte by Phunware acquisition and…

Thanks, Matt. Last year, people spent a third of their waking hours on their phones according to the app [indiscernible] 2022 report. That's almost five hours per day. So, just to estimate that an astounding 90% of the global Internet population uses a mobile device to go online. At Phunware, 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. With tech-enabled contextual engagement by leveraging data and unifying disparate third-party solutions to deliver the right content and 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 solution, 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 offering 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 our [indiscernible] engine to…

Thanks, Randall. As highlighted throughout today's call, we are all extremely excited by the ongoing scaling of our MaaS Blockchain ecosystem and the high performance computing systems being shipped to consumers via Lyte by Phunware. What it means to me is that our decade plus of MaaS platform building across mobile, cloud, and big data accompanied by our years of community engagement and blockchain and cryptocurrencies have resulted in a culmination and convergence of massive global addressable market control that can continue to act as strong wind in our backs to further accelerate our continued growth. We expect this ecosystem to complement and supplement our core MaaS 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 Phunware 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 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 the PhunCoin, but also to reward them for their engagement with PhunToken, which can be purchased online with U.S. dollars, Bitcoin, and Ethereum at buy.phuntoken.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…

Certainly. [Operator Instructions] Your first question is coming from Darren Aftahi from ROTH Capital. Your line is live.

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

Yes. Let me start with that and then I'll hand over for additional commentary from Matt and Randall. Importantly, so when you break out different parts of the business, on the software side, obviously, we had very high gross margin, 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 and 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 larger numbers, which help-out the margin. The other big part is obviously with Lyte by Phunware. 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 a bigger facility that could scale up, and as Randall said, can support up the 75 million plus 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, we can set up procurement and supplier relationships to have more scale and economies with both buying discounts with a big focus on about $120 customer acquisition cost. So, all those elements combined and really would get into the operating leverage as it relates to those three core areas of the business. And then to your point about selling through in-direct 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, what people need to understand is, the world is consumed by point solutions, 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, they're inundated with a bunch of point solutions. And so, for us, the value of working with in-direct 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 [indiscernible] is important. When you think about like a consulting firm or a systems integrator, they're thinking holistic 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, 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, they got to kind of remain unbiased, but you want to be their first call. Like, look, I've got a customer, they've got a problem, they need a mobile strategy, and we're going to call Phunware 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 sales motions forward. It's a big process. It's fuel regs portal. It's collateral. It's training. It's dealing with VARs, but once you get them going, they can sell, we can support and then we can start realizing that 75% gross margin across all our deals rather than the lower margin stuff where we're still, kind of carrying most of the load 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. 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 that that portion of the – if that dynamic changes at all, if it's indirect versus direct time to get up and running with the final customer?

Yes. It depends on what it is. Like with Carrier, we're actually integrating our code into their solution. So, you can imagine in integrating our technology into a multibillion dollar platform. That's going to come with a lot of building consensus, getting approvals, and things of that nature. With other things where it's like we're just kind of Lyte labeling stuff, it's a lot easier because they're kind of selling it under their own [Cox ProCyte] [ph] for example is going after a clinician experience in healthcare, but using a lot of our code to kind of get, you know, set it up a 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 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 Atlanta. 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, you know, 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 a full feature rich mobile application out the door and we're talking a week. Usually the biggest bottleneck at Apple and Google just approving things. And then 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, 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. Appreciate you taking my questions.

Thank you. Your next question is coming from Ed Woo from Ascendiant Capital. Your line is live.

Yes, Alan, I want to say it was great working with you and I wish you best of luck in the future. My question is, has there been – a gain to be more macro concern, especially with IT firms? What is your outlook into 2023 in terms of sales cycles and IT budgets?

Yes, great question. Thank you very much for the kind comments. This is – I won't be going too far away, but I do appreciate all the kind words and it's been great meeting with many of you guys and working together overall 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] [ph] with high interest rates and inflation. So, I think what we've seen across everything as Randall alluded, one part of our business is what used to take us 6 to 12 month cycles. A lot of times we see those down at 3 to 6 month cycle 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 6 to 12 months 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 a few deals in our pipeline that actually shifted out into Q1…

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

Thank you. [Operator Instructions] Your next question is coming from Howard Halpern from Taglich Brothers. Your line is live.

Good afternoon guys.

Hey Howard, how are you doing?

I’m okay. In terms of the acquisition landscape out there. I mean, 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 potential acquisitions outside the U.S?

Yes. I think that's a great question. And what we've seen is, if I was going to use the joking analogy in the U.S. we like to say, kind of [we suck less] [ph], so to speak. You're seeing lots of currencies around the world that are collapsing to 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 micro caps, small caps, 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 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 million or 200 million in revenue. And you're seeing often market caps that might be, kind of in the 40 million to 80 million market cap range. And many of those are coming across with $10 million, $15 million worth of EBITDA to go with it. So, obviously there's a lot of work you have to go in to say, is this the right fit? What's the nature of what the motivations are for selling and teams that want to stay or not stay? And then there's a lot of, sort of recognizing the harsh realities of what's happening in the economy worldwide,…

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 type of margin profile or why do you hope to achieve by the end of the first half of next year?

Yes, I can take that one. This is Matt. Yes. So, I think we've said before, we're targeting that business to be in, kind of the 20% plus gross margin profile. So, like we've said, it's not going to happen overnight. 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 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 kind of 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 Knitowski, President, CEO, and Co-Founder of Phunware for closing remarks. Please go ahead.

Thanks. In conclusion today, I just wanted to say much I appreciate value, all of your interest and engagement with our company. Obviously, we've got a nice footprint of headquarters here at 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 Phunware, 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 Phunware at the [backend call] [ph] with 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 the Phunware family worldwide leading into our annual General Meeting, which will formalize and get completed tomorrow. I had a great pleasure of talking to shareholders on a worldwide basis, including some net new retail investors that we found in India with large fund where holdings that we're 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. So, 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…

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.