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 Web site 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 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 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, 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 Q2 constituted constituted continued operational momentum for our business as we further accelerated our MaaS platform vision and adoption across the 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…

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 Web site 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 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 1 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…

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 experienced 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…

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 abd 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 MasS 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 [Operator Instructions]. And the first question this afternoon is coming from Darren Aftahi. Darren, please announce your affiliation and pose 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 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 unit swap 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 securitized 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 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, it's kind of -- this is not even be -- we haven't even begun to , if you will. And so this is something that we expect to kind of see come online a little bit more next year.

My next question, I'm just curious on the -- I suppose what caused the sequential improvement in Lyte. I know, I think Randall, you mentioned that the facility opened up last week, unless I misheard that. But I'm just curious what provided the lift for this quarter? And then moving facilities aside, what other levers can be pulled to kind of improve those margins in the hardware sector moving forward?

It's no different than like probably the original kind of thesis that we kind of talked about in Q4 about saying, okay, here's an interesting business with a hard charging entrepreneur that is doing the best he can, but he's young and has -- is basically doing it the old fashioned way. What if we bring strategic supply relationships to the table, what if we bring everything that we know about influencer marketing and different ways to market. I mean, at the end of the day, anybody who's been selling on Facebook knows that the last year and a half has been a total wake up call. Apple and Google are going to exhibit monopolistic control, because they're monopolies. And Facebook's not the big dog in town if it's run on iOS and Android platforms. And so it's getting harder-and-harder to reach people. We know a little thing about that, that's some of the inspiration for what we're doing with our blockchain enabled ecosystem. And so it's really just giving a really impressive young entrepreneur more resources than he had when he wasn't under the Phunware umbrella, really making sure that we kind of teach him all the best tools and tricks to the trade in terms of marketing, and then expanding from there. We've got obviously a warehouse double the size, they were spilling out in their last space and it was not an optimal layout. They didn't have a functioning ERP system. And so it's really just taking a really promising business and some really promising people, and then giving them the resources they need to succeed and that's how we want everybody to think. Any target at Phunware, Tushar Patel is a great executive at Phunware, Phunware bought his company many moons ago and he thought he'd probably go off and do something else. And he's still a material member of the executive team. We are a great company. We do expect a lot of inorganic growth going forward, and we're very entrepreneur friendly. And so I think you're seeing that in the numbers.

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 gets unaffected by that, because whether there are or 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 immediately accelerated that and almost doubled it within the Q4 range when we first finished our initial integration. We've been optimizing since. And every quarter since we bought them, the gross margins have continued to expand each quarter, quarter after quarter after quarter. We're working to make sure that happens going forward. And 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 kind of pleased that we've actually gotten in a situation now where our business in that side is now bigger than before COVID. We expect to be up somewhere between 50% to 75% this quarter versus last quarter. And 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 company is 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…

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 kind of mix use. Residential, when we say residential, it's kind of evolved now. When you think about how people live, work, play, want to do that kind of all within a working distance and a walking distance. And so we have done a few of those. We actually have one of the largest mixed use developments in the country down at Fort Lauderdale, it is a customer of ours. And so it kind of really underscores something that I think continues to get lost. And then I touched upon it, Alan has been preaching this forever. We're not one mobile application to replace them all, we're one mobile application to rule them all. AWS doesn't care what you build with its cloud services, it just wants to give you the best cloud services to build whatever you need in order to excel at your business. That's what every gated community mixed use facility, any sort of -- what we are seeing a lot of times now is even like, you think of like Fenway Park, you think of these places where stadiums are, look at what's being built in Vegas, these are communities and resorts in and of themselves. And think about all the complexities that requires. You have different POS systems, you have different ticketing systems, different valet systems, because the world, and I've spent a decade in venture capital, Alan's been investing forever as successful serial entrepreneur. And investors will tell you, you've got to be laser focused on one thing, and what that created is a bunch of entrepreneurs out there building point solutions that only tackle one small part of the problem. And so what we've endeavored to do is cast a much wider net…

And 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 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…

[Operator Instructions] 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, [Gigabytes] 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 is like 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 , 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 a 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…

And I assume that -- well, I shouldn't assume. Can I just confirm, does your backlog support this view for the -- specifically the hardware, the Lyte business, that you'll 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 kind of report them out. The backlog 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 are going to see Q2 as potentially it could kind of be the low point for Lyte 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 is looks like it's going to be decent. I think October's a little bit slow as people kind of wait for the kind of 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'll take this, and me and Randall, and Matt talk about this like constantly. And what's weird is we're talking about it from the context that we've already been through many of the several crypto cycles. So it's kind of interesting. The first time you go through a crypto cycle, it feels just horrible. Like you see these amazing highs, these horrific lows, everything's going to die. You see the Bitcoin is dead for the 500 time since it started 12 years ago. For us, it's a little easier to stay measured and not get overly elated by the highs or overly worried about the lows. Right now it seems like for this particular cycle, there's a lot of strong evidence that the low was kind of put in. If you look at what just happened in our impairment that we wrote down, I think, you all were estimating like a five set earnings per share loss from operations that's basically what happened. We hit that number as you expected. And in reality, we had a $0.17 per share loss where $0.12 of that was just the impairment tied to Bitcoin. So we basically wrote the Bitcoin down to $17,700 per token. And we also took an impairment on Ethereum to write it down to $900, and that's the way GAAP and FASB treated. You literally, from when you buy it, you take the lowest possible price that's ever touched and you write it down to that value. And obviously as we stand here today with Bitcoin back over 24,000 and Ethereum pushing a couple thousand, where it's back to like 1,900, 1,800, depending on any given day. We already have over $5 million in unrealized gains tied to those positions that we wrote down. And we don't really…

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.