Phunware, Inc. Q2 FY2022 Earnings Call

Good afternoon, ladies and gentlemen. Welcome to Phunware's Second 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 second quarter 2022 investor conference call. As a reminder, Phunware is a 13-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 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 B2B and B2G 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 B2C 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, 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 Q2 constituted continued operational momentum for our business as we further accelerated our MaaS platform vision and adoption across a number of key fronts, including new product introduction, indirect channel expansion, digital asset expansion, and a more than 282% sequential gain in year-over-year revenue growth, representing a new second quarter record for reported revenues as a public company. In parallel, the conclusion of Q2 subsequently provided even more growth to our business as we further scaled our Lyte by Phunware hardware sales and continued to improve our balance sheet, including a current digital currency balance of more than 653 Bitcoin, 753 Ethereum, and DeFi positions valued in the aggregate at more than $18 million at today's trading prices. Importantly, and in tandem, we are reiterating our forward revenue guidance for 2022 of up roughly 250% year over year or $25 million. In parallel, we also expect that the second half of 2022 will represent a new second half record for reported revenues as a public company for its comparable period. Our CFO, Matt Aune, will break down these details and forecast further in his section of the earnings broadcast. In terms of our current operating environment, our core B2B and B2G customers are continuing to return to their offices and facilities, remaining in a hybrid transition with regards to their employees and contractors safely returning back to work. We continue to expect that cities, states, and countries will continue opening on a broader basis throughout the balance of 2022, while also understanding that this process remains an ongoing and unpredictable journey. In parallel, our B2C customers are both active and fully engaged, demonstrating strong demand for hardware and cryptocurrency alike, completely independent of what we see within the private and public sectors. As suggested previously in past quarters and reiterated again 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 MaaS 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 MaaS platform. In addition to continued enterprise and government interest in our MaaS digital front door solution for healthcare, our MaaS Smart Workplace solution for corporations, and our MaaS Smart City solution for cities, 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 new customer wins for our team, including Sunrise Media, Media Sequel, Puget Sound Energy, Cooperative Energy Efficiency, SoCalGas, American Land Title Association, Prestige Care, and Tacoma Arts Live amongst others. In conjunction with growing our portfolio of direct customers like these, we also further expanded our global footprint by amplifying our go-to-market strategy with core indirect sales and channel partners now including Sirius Healthcare, CDW, Convergent, SALTO Systems, Axion Labs, Primus Tech, Cooper Lighting, Lutron, Verizon, MKT Consulting, Cox Business, Newcomb & Boyd, TD Synnex, Komport, Simplr, Hiro, Contact.io, and HID. We remain extremely excited about the post-launch scaling of PhunWallet and our blockchain ecosystem powered by PhunCoin and PhunToken, including the recent addition of Phunverse 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 MaaS customer data platform and our MaaS mobile loyalty ecosystem. During Q2, these important activities included the trading expansion of PhunToken on decentralized exchange Uniswap and the trading commencement announcement of PhunCoin on centralized exchange Securitize. As stated above, we are extremely excited to announce today more than 282% sequential revenue growth year-over-year, which is above our prior guidance of more than 275% year-over-year as previously promised. Additionally, and in parallel, we are again reiterating our forward revenue guidance for 2022 of up roughly 250% year-over-year or $25 million, while also reaffirming our expectation that the second half of 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 strategies 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 B2C engagements 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 half and even more excited by what we see coming in the coming quarters ahead. First, we continue adding new customer wins to our existing MaaS bookings, backlog, and deferred revenue total for Q2 revenue recognition over one to five-year contract periods that will ultimately provide SaaS revenue recognition over the coming 12 to 16 months rolling forward. While these efforts did not provide instant or near-term gratification on revenue recognition for our P&L, they importantly demonstrate the ongoing health of our business and will be broken down in further detail by our CFO in his section of the earnings broadcast. As a reminder, and with our MaaS sales cycles typically representing six months on average, recent and pending customer wins will start appearing on our P&L in the coming reporting periods ahead. Second, we continue expanding our installed base of Phunware IDs on MaaS to more than 15 billion devices worldwide, including MaaS platform scalability capable of supporting up to 5 billion transactions per day, 500,000 per second, and 1 billion unique devices per month. With more than one petabyte of data, typically growing at more than 5 terabytes per day when operating at scale, our MaaS platform now provides a robust customer data platform, inclusive of both a detailed data oncology and a comprehensive knowledge graph for one-to-one interactions and engagement. And third, we commercially launched and continued scaling our PhunWallet mobile applications on Apple iOS and Google Android in conjunction with our MaaS blockchain ecosystem, all powered by our PhunCoin and PhunToken digital assets now including Phunverse for the virtual world. Our PhunCoin security tokens only appear on our balance sheet due to their status as a regulated security; PhunToken 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 Lyte by Phunware hardware business at all, and it only just launched the MaaS loyalty and rewards ecosystem anchored by PhunToken and PhunCoin. However, fast-forwarding to today, we now have both lines of business active and are continuing to scale them productively, including the first half of 2022 edition of the PhunWallet mobile application portfolio on Apple iOS and Google Android and its accompanying virtual world metaverse, which we have branded and launched as Phunverse. At this time, our CFO, Matt Aune, will go deeper into our second quarter financial performance as reported, including our strong sequential revenue growth year-over-year and our continued balance sheet improvements and our expectations for the second half of the fiscal year. Matt, please go ahead.

Thanks, Alan, and good afternoon, everyone. I'd like to thank you for joining us today for a review of our second 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 second quarter 2022 totaled $5.5 million, which represents 282% growth year-over-year. Our platform revenue represented 30% of net revenues or $1.6 million, growing 13% over Q2 of last year. Our hardware revenue or Lyte by Phunware, as we have branded it, represented 70% of net revenue totaling $3.9 million. Gross margin was 27.7% compared to 21.7% in Q2 of last year. On a non-GAAP adjusted basis, gross margin was 28.6% compared to 44.4% in Q2 of last year. Platform gross margin was 64.9% compared to 21.7% 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's gross margin was 12%, which we're pleased to see with an improvement from last quarter. However, we still have work to do to fully streamline our supply chain and expand gross margins to be more consistent with our mid and long-term operating goals. Total operating expense was $9.1 million, up from $4.5 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 $0.8 million this year compared to $1.1 million in the prior year. By excluding these one-time and non-cash charges, adjusted operating expense was $8.2 million compared to $3.4 million last year. We have continued to invest heavily in sales and marketing to drive growth while efficiently integrating Lyte by Phunware operations and rebuilding portions of our expense structure that we paused due to COVID during the first half of 2021. We are comfortable with our existing cost structure and confident we can scale the business with our current people and facilities. Non-GAAP adjusted EBITDA loss was $6.6 million compared to $2.7 million last year. Net loss was $17.1 million or $0.17 per share compared to $7.8 million net loss or $0.11 per share loss last year. The main factors driving the reported net loss were the accounting treatments that we were required to take, although they have minimal to no cash implications to operations, as I have previously explained. These factors include the impairment of digital assets of $12.2 million in the current quarter. Non-GAAP EPS adjusting for these items, along with stock-based compensation and amortization of intangibles, was a $0.08 per share loss for the quarter compared with a $0.07 per share loss in the same quarter last year. Backlog and deferred revenue at the end of the quarter totaled $5.2 million, down from $8.6 million the same quarter last year. We are extremely pleased with our bookings to start Q3 and our pipeline for the second half of the year. We expect backlog and deferred revenue to trend upwards from a low point to end Q2. Moving to the balance sheet, we closed the quarter with $2.7 million in cash and $2 million in debt. Subsequent to the close of the quarter, we reached an agreement with our partner, Stellar V Capital, increasing our borrowings to roughly $12 million. So we could ensure we have enough operating cash without having to dip into our crypto holdings or sell equity through our ATM. We currently hold just over 653 Bitcoin and 753 Ethereum, with an aggregate value of approximately $17 million based on today's prices. In addition, we hold just under $1 million of decentralized finances or DeFi holdings, which currently yield roughly 20% annually. In closing, we're thrilled to have continued to build on the momentum created in Q1 by posting another record quarter of top-line revenue. As we look toward the second half of the year, we are optimistic about our ability to scale the business and drive higher margins as we grow. We are committed to continuing to build revenue and market share in all business lines 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 and the capital markets. The next major financial conferences we will be attending are the Needham Second Annual Crypto Conference on September 8th, the H.C. Wainwright Global Investment Conference on September 12th through the 14th, and the UBS Global 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.

Thanks Matt. Although there has been significant pressure on markets the first half of the year, we are weathering the storm well and meeting our previously disclosed guidance. In order to maximize shareholder value, our focus for the quarter has been centered around five key objectives. First, improving the features and scalability of MaaS to not only drive adoption and shorten our sales cycle, but also enhance our margin profile. When thinking about MaaS and the expansion of its feature sets, remember that Phunware is no longer a custom mobile development firm but rather an enterprise technology company that is deploying a complete solution to drive not only contextual engagement but also interoperability. It's important that investors understand some of our core competitive advantages. I am most proud of the people we have around the table and the more than decade of experience we have deploying mobile applications that exhibit game-like mechanics and behavior. With an average tenure of more than five years, we have experience addressing any need across any industry to deliver the right solutions on budget and in time, that have the potential to drive digital transformation. True digital transformation can only be achieved through a platform approach. Any brand that is looking to tech-enabled experiences and/or venues will be forced to account for numerous third parties, such as productivity suites, scheduling software, occupancy management platforms, and parking systems, as well as temperature and lighting controls, just to name a few. To get a better sense of this, I would encourage everyone to check out the Norfolk Southern app demo available on Phunware's YouTube channel. At this time, we've integrated over 25 separate third-party functions that are all accessible through a single sign-on and one seamless mobile experience to tech-enable the workforce experience for Norfolk Southern employees and visitors. In fact, we have already done the work to integrate well over a hundred other third-party solutions and will continue to add additional integrations each quarter as we work with brands to maximize utilization of investments they've already made in point solutions. The following list of just some of these integrations will be available on the transcript. Of course, the reason we developed MaaS was to ensure we have the ability to rapidly deploy mobile applications that come pre-integrated with our core functionality and can easily integrate any integration the brand may need. We give brands the ability to license mobile software the same way they might license a CRM from HubSpot or cloud services from Amazon. Speaking of pre-integrated MaaS capabilities, one of our most compelling competitive advantages is the software we've developed internally to triangulate a mobile device indoors, the same way GPS and satellites can locate a mobile device outdoors. Our patented MaaS LBS software and beacon management solution provide native mobile-first capabilities to deliver proximity, sub-one-second real-time blue dot indoor positioning, navigation, and wayfinding functionality across any campus or facility, while simplifying and streamlining the underlying beacon deployment and management. Our mobile solutions are not only ADA compliant, addressing the needs of anyone who is visually impaired, hearing impaired, or mobility-challenged due to everything from a wheelchair to a stroller, but also transition seamlessly between indoor and outdoor environments. These competitive advantages have enabled us to introduce digital transformation to brands and industries who are also late to adopt mobile, but desperately need competitive advantages of their own in order to drive profitability and productivity in the wake of the COVID-19 pandemic. As of this quarter, our most active industries in our software pipeline are healthcare, hospitality, and sports and entertainment. While our average deal terms remain three to five years, we have 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 a closest deployment we have to true SaaS. Hospitality, on the other hand, represents 25% of our pipeline with an average deal size of over $1.1 million and are seeing a lot more attention now that our smart hospitality solution is live at Atlantis in the Bahamas. For our data and rich media opportunities, the most active industries are retail, government, and healthcare. But we are seeing a lot of new growth in food and beverage, travel, and sports and entertainment. As I discussed in May, we have been pursuing direct engagements as brands seek to have more control and transparency across their targeted media initiatives. At this time, retail and healthcare represent approximately half of our pipeline, with an average deal size of $40,000 and $120,000 respectively. Blended, our gross margin for our platform deployments was 64.9% in Q2, which reflects a lot of the investment we've made to bring the best of SaaS to mobile. Second objective, activating indirect channels by ensuring our partners have the training collateral and proper incentive structures in place to be successful. These types of partnerships are essential to our sales strategy to scale revenue through four primary channels comprising our global reseller network; one, hardware vendors; two, software developers; three, system integrators and strategic consultants; and four, telecommunication carriers. In order to effectively support our channel partners and our customers, we offer comprehensive webinars, case studies, articles, e-books, and additional training opportunities. The Phunware Phenom Certified Developer Program is also available to provide on-demand courses and live training sessions remotely to learn more about MaaS and how it helps brands to better execute their digital strategy and establish a true mobile presence. In parallel, we provide full MaaS documentation and software portals via the Phunware documentation portal and GitHub respectively. Third objective, launching a compliant blockchain ecosystem to better incentivize and authenticate consumer engagement. By leveraging blockchain technology, we now have the opportunity to deliver solutions that can not only authenticate and compensate who is being engaged with PhunCoin but also incentivize that engagement with PhunToken, while leveraging our MaaS customer data platform to give consumers better control over their data and their relationship with brands. To that end, we were excited to announce the release of a foundational update that enables a comprehensive user registration and profile experience to make it easier for ecosystem participants to register, as well as recover existing accounts across new devices and platforms. This update will also help us establish the backend functionality required to support the proper ownership of data and fair compensation with PhunCoin. Looking ahead, we are well positioned to commercialize the world's first truly decentralized data economy with a robust infrastructure required to support an Oracle network that bridges Web3 applications to Web2 data with Lyte by Phunware, as well as a persistent mobile-first connection to consumers through PhunWallet, which is available on both Apple iOS and Google Android. As an extension of our MaaS platform, we are working on regular product updates to our dual-token ecosystem, but larger roadmap milestones include; enhancing the profile experience to give users more control over their information they choose to share; the ability to update and access that information and in an auditable account of their engagement activity; new support functionality that allows users to refer friends, family, and colleagues while being rewarded for the networks they build; and location-based marketing that will enable consumers to interact with brands in the real world and be seamlessly rewarded with PhunToken. We are also focusing on token velocity and security for both PhunToken and PhunCoin by enabling our own layer two scaling methodology. As our functionality and roadmap expands, we expect to more aggressively target the developer community so they can build on top of the framework we've created. In the meantime, we will continue to provide exciting new resources through our new phuntoken.com website that will help drive mainstream adoption, such as whitelisting for liquidity providers, a step-by-step guide to providing liquidity, and a staking calculator. You can also check out the Feed the Phun section for the latest and user-generated content from our growing community. We plan to do for data what Bitcoin did for finance, by disintermediating data oligarchs and empowering individuals to manage their first-party data and consent without the need for an intermediary. In parallel, we are positioning ourselves as a platform that can enable third parties to develop on top of our framework in order to capitalize on the benefits of blockchain without many of the administrative and regulatory headaches. Fourth objective, migrating Lyte by Phunware to Austin, Texas and ramping sales. We are pursuing a direct to consumer selling strategy that is supported by a comprehensive marketing effort, focused primarily across Facebook, Instagram, YouTube, and TikTok. Fortunately, many of these customers are also ideal targets for our blockchain marketing efforts, so we hope to achieve certain economies of scale. After ensuring our supply chain is scalable, we have begun the process of not only increasing our marketing spend but also targeting English-speaking markets outside the U.S., such as Canada, Great Britain, and Australia. As of last week, we have taken occupancy of our new facility just outside of Austin near Dell headquarters and have begun assembling orders. I doubled the size of our old warehouse in Illinois; we will have plenty of room to expand, and the more efficient layout will better support our revenue growth targets. We believe we’ll be able to scale almost 4,000 shipments a month and could achieve up to $75 million in revenue before having to consider expanding again. In addition to a more functional layout, we're also working to improve our margins through efficiency improvements, such as implementing a new ERP system. Fifth objective, engaging more investors with a focus on institutions to drive awareness, volume, and stronger price appreciation. We have been working closely with Gateway, ROTH Capital, and H.C. Wainwright to set up non-deal roadshows to share the Phunware story more broadly and why we believe today represents a great entry point as larger investors look to build out a position in PHUN. To that end, we are up over 25% with an average daily volume of more than 2.6 million shares since we last reported and are excited about upcoming announcements in the second half of the year. As of the end of the quarter, we have 116 employees. Since the majority of our employees are in California and Texas, we are evaluating new space in Irvine to complement our San Diego office and have recently taken occupancy of our new headquarters in Austin. Dubbed the Phunhouse, this converted historic home is the best of both worlds, giving our employees the ability to work from the office and a home. We are also using this space as an executive briefing center to showcase the best of what Phunware has to offer. Of note, we expect to be fully back in the office by the end of the year.

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 in blockchain and cryptocurrency, have resulted in the culmination and convergence of massive global addressable markets and trends that can continue to act as a strong wind in our backs to further accelerate our continued growth. We expect this ecosystem to compliment and supplement our core MaaS offering as we offer our enterprise customers additional capabilities to identify, engage, and accept 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 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 customers to not only regain control of their data with PhunCoin, but also to reward them for their engagement with PhunToken, which can be purchased online with US 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 that will provide more customers, more partnerships, and more distribution for our MaaS platform and cryptocurrency ecosystem, especially in international markets, including Europe, Asia, and South America. Finally, and importantly rolling forward, we expect to maintain a laser focus on our core operating and financial model, which includes a rather breathtaking top-line revenue growth of 250% 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 strength 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 meaningful financial returns for our overall operations and results. With that, and in conjunction with a sincere thank you for your ongoing interest and support and all that we do on behalf of the entire Phunware family worldwide, I would like to now open up the call for questions through the operator. Operator, go ahead please.

Thank you. The first question this afternoon is coming from Darren Aftahi. Darren, please announce your affiliation and ask your question.

This is Austin Vetterick on for Darren. Just a few if I may. First, could you just briefly touch on or give us a sense on where you're at with token sales, and roughly how much that contributed to revenue? And maybe just an updated timeline, I guess, when you expect to have those fully issued just based on the cadence of what you've seen so far?

I'll give a highlight and then let Matt kind of give you a little more detail. On the token sales, we don't break out individually, but we do include specifics inside the platform revenues. Relative to plan that we set up for both first and second quarter, we actually beat materially on both of those marks that we have internally. As you know, we have been listing at buy.phuntoken.com, so we have a direct means for those that are interested in purchasing the tokens to be able to do so through our portal. And so far, we are live on a decentralized exchange, where once people have purchased these tokens or used the tokens in their ecosystem, they have the ability to obviously use Uniswap in decentralized exchange for asset swaps. When I separate the utility token and PhunToken from the security token and PhunCoin, PhunCoin is currently just waiting for some final opinion letters. The security token market is a brand new market. The ATS that Securitize is unique. They are doing a lot of active development, and so really hasn't been a token like this; it's actually been released by any company yet alone a publicly traded company on NASDAQ or the NYSE. So right now what we are seeing is a organic use of those that are downloading the iOS and Android portfolio for PhunWallet. You can get those at Google Play on one side and Apple iTunes app store on the other. And then once those are downloadable, you have the ability inside to either earn through engagement, behaviors like answering surveys, ultimately a lot different things from playing games to interacting with brands to doing check-ins in the physical world and watching videos, sharing things, and really engaging in the demographics that brands are interested in. And as we go forward, we will try to continue to highlight things within the overall platform revenues. Matt, do you want to actually have any specific comments that you'd like to add to that?

No, I think you said it well there, Alan, and you guys will obviously see in the Q here. But I did in my prepared remarks there, platform revenue for Q2 just about $11.6 million versus about $1.4 million for the same period last year. So definitely some improvement there, and excited about that.

I would just add, the last part of your question about kind of timeline on when we'll finish. Theoretically, not anytime soon. At the end of the day, we're not building this to try to emulate Dogecoin or something like that. We're building this to sell these tokens to large brands, organizations, and institutions who want access to the features and capabilities of our platform and who can deliver those features and capabilities through PhunToken as kind of a unit of measure. And so this is something that we’ll roll out over time. We're not focused on pumping or hiring a bunch of promoters. We're really just sharing the story and working with large brands on what kind of utility they need in order to deliver new capabilities to better engage their customers. As we talk about MaaS, when we think about this idea of engagement, incentivizing that engagement is very interesting for a lot of these brands if what they're doing really drives profitability. And so that's kind of where we're at right now; we haven't even begun to see significant traction. This is something that we expect to kind of see come online a little bit more next year.

My next question is about the reason for the sequential improvement in Lyte. I believe Randall mentioned that the facility opened last week, unless I misheard. I'm interested in what contributed to this quarter's lift. Additionally, aside from moving facilities, what other strategies can be implemented to enhance margins in the hardware sector moving forward?

It's similar to the original thesis we discussed in Q4, where we saw an interesting business led by a driven entrepreneur who is doing his best but is still relatively inexperienced and relying on traditional methods. We considered how we could provide strategic supply relationships and leverage our knowledge in influencer marketing and other marketing strategies. Over the past year and a half, anyone selling on Facebook has had to face significant challenges as Apple and Google maintain monopolistic control. Facebook becomes less dominant when accessed through iOS and Android platforms, making it increasingly difficult to connect with audiences. This understanding has influenced our development of a blockchain-enabled ecosystem. Our goal is to equip a promising young entrepreneur with more resources than he previously had outside of our organization, ensuring he learns effective marketing tools and techniques, and then expanding from there. We have also doubled the size of the warehouse, as their previous space was cramped and poorly designed, lacking an operational ERP system. Essentially, we are taking a promising business and talented individuals and providing them with the necessary resources to thrive. Tushar Patel, a significant executive at Phunware, originally thought of pursuing other opportunities after we acquired his company, but he remains a key part of our executive team. We are confident in our company’s potential and anticipate considerable inorganic growth in the future, which reflects our support for entrepreneurial endeavors.

The only thing I'll add to that, which Randall captured, which is great is, we've seen that with all the start and stop of COVID and who's going back to work and who's not. Obviously, we focus Lyte sales here in the United States, but we'll have an opportunity to scale that by looking at other geographies. I think we're being pretty deliberate and taking our time. As Randall very correctly stated, we wanted to get all of them moved down from Illinois to Austin; that's done. We wanted to get the facility reopened and manufacturing and integrating things again and shipping; that's happened. And now at this point, now that we've got a lot more of the supply chain, the logistics, the strategic relationships, now we've been investing a lot in outbound sales with that. And importantly, when you think about PCs and high-end performance computing, whether a state is red or blue, the reality is that people are using these systems at home for personal use and also for high-end professional use, and there's still a lot of remote work and people that haven't gone back to the offices yet. And so the good news is Lyte by Phunware is largely unaffected by that, because whether there are or are not lockdowns or people are or not going back to work, people are still buying these systems, and they need them to operate and to engage wherever they're at. I think that's going to be very telling. And one of the things I think we're really proud of is that we took the size that Lyte was when we bought it, we kind of doubled it, and we're trying to make sure that's doubled again for Q4. Ideally, in Q4, we're hoping that we will be on a run rate that will have allowed us to effectively double their business once and double their business again in terms of run rate as we exit 2022.

And just one last quick one for me. I'm curious if you can speak to any of the maybe direct deals that you'd expect to maybe hit the P&L rolling into the second half of the year. And similarly, if that rough timeline still stands on some of the more indirect partnerships kind of coming to fruition as far as the P&L is concerned, being more of a next year story, if that's updated at all.

Let me take a certain part of this. We actually have in our application transaction business, which used to actually be 20% direct in terms of getting the media advertising budgets that actually were designed on mobile to reach users wherever they may be and a lot of campaigns that went with them. Over the COVID period, we spent a lot of time and investment in restructuring how the sales worked for that; went on a much more direct basis, and I'm kind of pleased that we've actually gotten in a situation now where our business on that side is now bigger than before COVID. We expect to be up somewhere between 50% to 75% this quarter versus last quarter. The other nice thing that we're seeing is that we're about 80% direct and 20% indirect, meaning we're getting those budgets directly from the companies, even government organizations like Miami Dade. And we're actually compounding that through other opportunities where we just don't have to deal with some intermediate agency. It's literally just businesses and governments coming directly to Phunware to reach the demographics of interest on mobile at scale. And so that's been a great part of that business. We touched on Lyte by Phunware. On the rest of the software business, we deal with those are direct and indirect channels. On the direct basis, we put a list of all series of net new deployments and we will have a few meaningful customer announcements that will be coming in the near term. We haven't named one but multi-million dollar, very large hospitality organization that we've closed with; we're going to start with one of their premium brands. We're going to start with their first five largest resorts, and then we expect that we can expand that deal into literally every other property that they have domestically and abroad. So we'll have information on that one coming soon. The other big thing that we'll have coming soon is another hospitality gaming-oriented group that we're about to kick-off their first property, and we expect if that goes as we expected to that there will be another 14 properties behind that. Some of these are going to get exciting, where they are not just a multi-million dollar win for an initial bite at the Apple but there could be 10x on top of that by distributing out to the rest of their properties, rest of their facilities. And the reason that's gotten a lot better is because what Randall mentioned earlier, we won Atlantis in the Bahamas. We went out. We delivered something of consequence. Now it's showing off to the world. People are seeing the uptick in engagement, commerce, consumer satisfaction; the productivity that the staff is seeing; the easier way to play mobile concierge through those applications. And now that people, we've even had, some of these groups have actually flown their executives down to the Bahamas to actually see and experience exactly what this is like, how wonderful it is and how it really provides a unique luxury guest experience. We have used that successfully now to go off and win two other major deals that we'll hopefully be announcing in the coming 90-day window. And from there, it's going to be scaling what we already won as opposed to fighting to get in the door.

The next question is coming from Howard Halpern.

I'm with Taglich Brothers, and congratulations guys, another great quarter. In terms of what you just spoke about, are you also seeing any activity within gated communities that are being built across the country for your concierge services?

I would say one of the things Alan mentioned earlier relates to mixed-use developments. The concept of residential living has evolved, and now people want to live, work, and play all within a convenient distance. We have engaged in several of these projects, including one of the largest mixed-use developments in the country located in Fort Lauderdale, which is a client of ours. This highlights an important point that often gets overlooked. Alan has consistently emphasized that we are not simply one mobile application to replace all others; instead, we aim to create one mobile application that can encompass everything. AWS doesn't dictate what you develop using its cloud services; it merely seeks to provide the best cloud services to help you succeed in your business. This applies to gated communities, mixed-use facilities, and other complexes that require intricate systems, much like the developments around Fenway Park or the projects in Las Vegas, which function as communities and resorts. Managing these environments demands handling various point-of-sale systems, ticketing systems, and valet services. My background in venture capital has shown me that investors often urge entrepreneurs to focus narrowly on one aspect of a problem, which has led to numerous small-scale solutions addressing only specific needs. Our goal is to adopt a broader approach and ensure that all those individual solutions can work together seamlessly. This integration will be essential for tech-enabling gated communities, mixed-use facilities, and resorts that depend on a multitude of vendors for diverse functions. The strength of Phunware lies in our ability to unify these components, creating a single operating picture with one sign-on and authentication system to manage everything needed. This is crucial in environments such as hospitals and hospitality venues, as well as mixed-use developments. One exciting initiative we are currently working on is exploring how gated communities can better utilize blockchain technology. For instance, in membership-based facilities like country clubs, we are looking into how NFTs could facilitate the fractionalization of memberships. We are focusing on innovative solutions that enhance people's living experiences and how we can tech-enable those real-world interactions. Our platform is designed to serve all types of buildings equally; a large residential complex is just as valid as a major hotel or office building. Whether you are purchasing an apartment or enjoying a cruise, our software can manage everything without any hassle.

Alan talked about the application transaction revenue bumping in the third quarter. Is that also going to be a consequence of customers joining up for the smart advocacy solutions as we enter the election season?

It's interesting on that part. They haven't necessarily been tied directly into the smart advocacy solution that we would see as the midterms kick in, and even more importantly, the big game, which is 2024, and a few years out still on the presidential election. What we are seeing is that much like we saw during the last two years, the average deal size and software kind of jumped from on average, give or take $400,000 to $600,000; we've now seen stuff where those are approaching more like low seven digits. So the cycle's been a little longer. When you jump in application transaction, similarly, when we switched from probably 80% through an intermediary and 20% direct, we inverted that, which is really important to 80% direct, 20% indirect. On top of that inversion, what we're seeing is that the average campaign spend has gone up significantly. It's probably double whereas those used to be just tons and tons of campaigns that might be four digits. We see a lot more of these five-digit campaigns and even some like Live Nation where we're doing campaigns per city, per county, per state, literally from coast to coast. And those are driving people through interactive on mobile to buy tickets or participate in events that are going on at stadiums, arenas, whether those are rock concerts, festivals, or any other sort of events that might be going on. And so what we're seeing there is just a lot of the spend that hasn't really happened in the last 12 and 24 months is coming on in a big way because people need to reach consumers, and they need to be able to dial people in for their products, their solutions, their offerings, especially as it relates to travel. And especially as it relates to entertainment because people want to get out with the pandemic being less scary than it was before; they want to go out and enjoy life and get back into things. So I do still expect that we're going to see a ramp of some activities that will likely happen as we lead in. November's not that far away. But so far we're just seeing, this is just flat out much more direct field, a lot more campaigns being run, a lot bigger size on the campaigns being run. And then this is coast to coast. So whether I use the Live Nation example of big brands doing it coast-to-coast by city, county, or state, or like I was mentioning Miami Dade, we started there direct with literally just one part of the government organization. And we now are probably working with about seven different departments on a direct basis, and they're finding great success. And these could be everything from as simple as things around traffic and driver's licenses on one side, it could be things tied to vaccines and health issues on another could be tied to hurricane preparedness from another group, transportation-oriented things. So refining is that's just a wonderful environment to be in because our solution, as Randall said, it just works pretty seamlessly. It doesn't matter what vertical you are in; it doesn't matter whether you're a government or business. It doesn't matter if you're trying to reach people at any specific venue. We just treat all those as unique locations, and if you want a certain demographic, we're trying to provide access to that where people are at on their mobile devices.

And our next question is coming from Lucas Ward.

This is Lucas Ward in for Ed Woo at Ascendiant Capital Markets. Just a couple quick questions. We've been hearing from companies like Nvidia, Micron, Intel, that there's been sort of an unexpected softening in some of the major end markets, including PCs, gaming, even mobile. I'm just wondering what you guys are experiencing from an in-market standpoint.

And what we've actually seen is we've been here in a lot of the same news. Obviously, we have lots of conversations, AMD, Gigabyte, and others in the supply chain, and we have heard some of that as well. So far, knock on wood with us. I think we've seen some other smaller companies that may have been competitors of Lyte that were similar in size or maybe where we're at now. Some of them have actually just not survived the pandemic and have gone away. Other ones have not been able to invest for what's happening now with new systems and going forward. And so we've actually seen a lot of interest in what we're doing. And we think we're probably capturing some market share from other competitors that either haven't been able to invest like we have or simply have not necessarily survived the pandemic and have either had a hard or soft landing through that process. So I do think that we went from a supply chain in Q3, Q4, which was outrageously challenging; like there was just a massive shortage of chips all around the world. And it was a really big effort that we had to work with throughout Q4, honestly, to support the demand that we had in the holiday window of Q4, and then we accelerated from Q4. In Q1, we even did more revenue. And if you can believe it, we literally had to turn-off demand in Q1, and we simply stopped producing machines at the very end of that quarter, because we were struggling to keep up with the demand. That's a fantastic problem, if you want to call it a problem. And then in Q2, what we saw is that you're never going to have just a simple every single quarter just magically accelerate because there is some cyclicality and seasonality to that business. So we expect when you see like Q2 is always going to typically be less than Q1 because you have all holiday Christmas and Hanukkah kind of sales that people might get gift cards or people commit to buying, but they don't process those until January. So it wasn't unusual to see a strong Q4 and then an even stronger Q1. Typically, you're going to see a back off on sorts in Q2 and then you start seeing a little bit of a reacceleration in Q3 and even more acceleration again into Q4 and Q1. So as time passes, I think what we are going to see is that you're going to have year-over-year for the comparable quarter, you're going to see up into the right. And then what you're going to see is that Q4 and Q1 are always going to be strongest, Q2 and Q3 are always going to be weakest on a relative basis. But again, each year it's likely to be higher. If we see anything new, next earnings call, we will definitely highlight that. But we are actually really excited. As I said earlier, I think we got from the run rate the company was on when we bought it. We kind of doubled it and we're trying to make sure that's doubled again for Q4. And if we have a strong Q4 as we suspect, that's probably going to lead to a strong Q1 just because of all the orders around Hanukkah and Christmas that don't officially hit until January.

Can I confirm if your backlog supports the view that, specifically for the hardware and the Lyte business, you will have a stronger Q3 and a stronger Q4?

Yes, certainly. So backlog, as Alan correctly stated, coming out of last year Q4, there is an awful lot of backlog that builds up going in through kind of the holiday season, and we are not able to get everything shipped out before January 1st. So the backlog is typically going to be pretty high coming out of the year. And then Q1, there is still some strength early in the quarter in terms of people still buying with Christmas gift cards or cash whatever it may be. And so there's quite a bit of backlog built up in Q4 and Q1. Q2, you will see the numbers when we report them out. The backlog and deferred revenue is down a little bit, and that's partially because we were able to kind of flow through a lot of the backlog with Lyte and get that stuff shipped out. The other reason it was very important for us to do that, because we are moving down to Austin and certainly didn't want to have to ship down a lot of orders that could already be shipped. So we did, it was a focus of ours to get the backlog out. I think traditionally you're going to see Q2 as potentially it could kind of be the low point for Lyte's backlog just because of the seasonality. And then it'll start to ramp back up as we get towards the end of the year. And there's, August, September looks like it's going to be decent. I think October's a little bit slow as people kind of wait for the Black Friday, November sales in December. So we'll keep obviously, we'll keep reporting and keep you all updated. But I think, it's typically we're going to see a little push to get the backlog out in Q2, and then we'll kind of build it back up there throughout the rest of the year.

Last question, as investors in crypto and producers, I guess, if that's the right word, of crypto. Do you guys have a view on when the crypto winter is going to end?

Yes, I've been discussing this with Randall and Matt frequently. Interestingly, we've already experienced several cycles in the crypto market. The first cycle can feel extremely daunting, marked by significant highs and severe lows, leading many to declare that Bitcoin is dead once again. However, with our experience, it's easier to maintain a balanced perspective, not getting too excited about the highs or overly anxious about the lows. Currently, there is substantial evidence suggesting that the low was reached. Regarding our recent impairment, you had estimated a five-cent earnings per share loss from operations, which aligns with our reported loss of $0.17 per share, with $0.12 of that tied to Bitcoin impairment. We adjusted the Bitcoin value to $17,700 per token and also wrote down Ethereum to $900 according to GAAP and FASB regulations. Essentially, we have to mark it down to the lowest price it has ever reached. As of now, Bitcoin is trading above $24,000, and Ethereum is nearing the $1,900 mark. We have over $5 million in unrealized gains from these positions that we cannot account for in the market. It appears that we have seen a capitulation event in the crypto cycle, similar to the long-term capital management fiasco in the late 1990s, driven by excessive leverage and poor risk management practices. The resulting fallout from Three Arrows Capital led to various bankruptcies and liquidity issues across the market, but this also exhausted sellers and led to significant liquidations, with the low around $17,700. While there might still be fluctuations, we are over halfway to the next halving event, expected around the second quarter of 2024. Each quarter, we observe record hash rates and security, with Bitcoin's blockchain operating continuously without interruptions. Notably, entities like BlackRock have shifted from skepticism to now launching an ETF to accommodate their institutional investors' demand for Bitcoin exposure, which drives prices up. We remain focused on building responsibly in the crypto space, prioritizing regulation and legality, and ensuring our platform serves as a safe entry point into this new realm. While Bitcoin will follow its natural course, I believe the turmoil stemming from Three Arrows Capital is largely behind us. With the necessary adjustments in place, we anticipate price appreciation alongside the record hash rates. Although we dislike writing down non-cash impairments, we now have significant unrealized gains while retaining the same Bitcoin holdings as before.

Thank you. And there are no further questions in queue at this time. And I would now like to turn the floor back to Phunware’s President, CEO and Co-Founder, Alan Knitowski, for closing remarks.

Yes, I'll keep it short today. I really appreciate your time, your interest. Matt, Randall, myself, and the whole team are working very, very hard. We've never been more excited about the future of the things that are held. We're happy to see that a lot of the carnage and chaos and the macro markets and the stock market, and just life in general is kind of calmed down a little bit. I do think that there will be a lot of strange activities leading into things like the mid-terms. Clearly, inflation is still an overwhelming piece that the fed is responding with rising interest rates. And so how strong the consumer can say if inflation is high and interest rates keep rising, that's going to be a challenge. We view the world that we're in a recession, two consecutive quarters of GDP contraction. And what we're going to do is focus on the things we can control. We're going to continue to go direct to consumers as it relates to our cryptocurrency offerings and our Lyte by Phunware hardware systems. And then we're really encouraged that we're starting to see continued activity, more openings of people getting back to the office, more companies that are opening up, and that will bode well for the things that we do both direct and indirect on software sales. So that being said, we are very much looking forward to a lot of announcements that we will have coming over the next several weeks and months, especially some of the ones we kind of teased out a little bit here. We just have to get a little further along before we can announce those formally, but they are under contract, and now we are in execution mode. So thank you as always for your interest. Any follow-ups, please go to investors.phunware.com, reach out to our IR team, and we are more than happy to engage. So thank you very, and have a great rest of your week.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.