Phunware, Inc.

Q2 2022 Earnings Conference Call

8/11/2022

spk07: Good afternoon, ladies and gentlemen. Welcome to Fundware's second quarter 2022 investor conference call. Currently, all participants are in a listen-only mode. Joining me today are Alan S. Natowski, President, Chief Executive Officer and Co-Founder, Randall Crowder, Chief Operating Officer, and Matt 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 Funware's website at investors.funware.com. I further encourage you to visit investors.funware.com to access not only the earnings press release, but also the current investor presentation, SEC filings, and additional collateral on Funware. At this time, I would like to turn things over to Funware's President, CEO, and co-founder, Alan Natowski. Sir, please proceed.
spk04: Thank you very much, and welcome to our second quarter 2022 investor conference call. As a reminder, Funware 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 Funware ID for every human being on Earth that has a device touching a network that is connected to their favorite brands, applications, and venues that just happen to run Funware software or intersect with our cloud-based infrastructure. On one side, we provide our 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 MASK. or multi-screen as a service, which is available for licensing under a SaaS business model over one to five-year contract periods worldwide. In our FundToken, FundCoin, and FundVerse, loyalty rewards cryptocurrency ecosystem for the physical and virtual world, which is facilitated transactionally with our FundWallet mobile applications for the Ethereum blockchain. The completion of Q2 constituted continued operational momentum for our business. as we further accelerated our mass 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 LiteFi firmware 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 second half 2022 will represent a new second half record for reported revenues as a public company for its comparable period. Our CFO, Matt Aune, will break down these details and forecasts 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 mass cloud, our data-driven loyalty marketplace, our secure blockchain-enabled token, coin, wallet, and metaverse capabilities, and our high-performance computing systems for gaming, streaming, trading, cryptocurrency mining, and personal productivity. Last year was the genesis of a powerful transition in our company's history. As we shifted from a non-recurring, low-margin transaction business to a far stickier, more scalable, recurring, and high-margin SaaS licensing business for our mass platform. In addition, to continued enterprise and government interest in our mass digital front door solution for healthcare, our mass smart workplace solution for corporations, and our mass 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, SoCal Gas, 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, Salta Systems, Axion Labs, Primus Tech, Cooper Lighting, Lutron, Verizon, MKT Consulting, Cox Business, Newcomen Boyd, TD Cynics, Comport, Simpler, Hero, Contact.io, and HID. We remain extremely excited about the post-launch scaling of FundWallet and our blockchain ecosystem powered by FundCoin and FundToken, including the recent addition of FundVerse for the virtual world to accompany our existing efforts already well underway for the physical world. We are continuing to aggressively scale and monetize this part of our business and look forward to the accelerated global adoption of both our blockchain-enabled mass customer data platform and our mass mobile loyalty ecosystem. During Q2, these important activities included the trading expansion of FundToken on decentralized exchange Uniswap and the trading commencement announcement of FundCoin 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 about 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 second half 2022 will represent a new second half record for reported revenues as a public company for its comparable period. As always, we will continue our core go-to-market strategy centered on direct and indirect agreements and contracts with Fortune 500 customers, especially in the Fortune 100 size range, and governments ranging from local and county to state and federal. In parallel, we will also continue to dramatically expand our direct-to-consumer channel for 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 mass bookings, backlog, and deferred revenue totals for future revenue recognition over one- to five-year contract periods that will ultimately provide SAS revenue recognition over the coming 12 to 16 months rolling forward. While these efforts do 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 mass sales cycles typically representing six months on average, recent and pending customer wins will start appealing on our P&L in the coming reporting periods ahead. Second, We continue expanding our installed base of Funware 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 transactions per second, and 1 billion unique devices per month. With more than one petabyte of data, typically growing at more than five terabytes per day when operating at scale, our MaaS platform now provides a robust customer data platform inclusive of both a detailed data ontology and a comprehensive knowledge graph for one-to-one interactions and engagement. And third, we commercially launched and continue scaling our FundWallet mobile applications on Apple iOS and Google Android in conjunction with our mass blockchain ecosystem, all powered by our FundCoin and FundToken digital assets, now including Fundverse for the virtual world. While FundCoin security tokens only appear on our balance sheet due to their status as a regulated security, FundToken utility tokens continue flowing transactionally through our P&L as net new and virtually 100% gross margin revenue. As a reminder, and during the comparable period in 2021, we did not have the Litebyte Fundware hardware business at all and had only just launched the mass loyalty and rewards ecosystem anchored by FundToken and FundCoin. However, Fast forwarding to today, we now have both lines of business active and are continuing to scale them productively, including the first half 2022 edition of the FunWallet mobile application portfolio on Apple iOS and Google Android, and its accompanying virtual world metaverse, which we have branded and launched as Funverse. At this time, our CFO, Matt Elney, 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.
spk00: 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, 8K, and website provide a reconciliation of all GAAP to non-GAAP financial results. Net revenues for the second quarter of 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 Life by Funware as we have branded it, represented 70% of net revenues, totaling $3.9 million. Gross margin was 27.7% compared to 21.7% 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, Light by Funware has a different margin profile as a computer hardware business than our higher margin platform business. Light by Funware gross margin was 12%, which we're pleased to see was 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 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 light-by-funware operations and rebuilding portions of our expenses 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 lost 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 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 $0.08 per share loss for the quarter, compared to $0.07 per share loss in the same quarter last year. Backlog and deferred revenue at the end of the quarter totals $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 upward from a low point to end Q2. Moving to the balance sheet, we closed the quarter with $2.7 million in cash and $2.0 million in debt. Subsequent to the close of the quarter, we reached an agreement with our partner, Streeter Bill Capital, increasing our borrowings to roughly $12 million, so we can 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 finance 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 in the capital markets. The next major financial conferences we will be attending are the Needham Second Annual Crypto Conference on September 8th, the HC 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. With that, I would like to turn the call over to Randall.
spk01: 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 Funware 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-enable 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 Funware'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 100 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 in the transcript. Of course, the reason we developed MAS 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 integrations a 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 MAS capabilities, one of our most compelling competitive advantages is 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 mass 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've seen our average deal size for new proposals continue to increase. For example, healthcare represents half of our pipeline with an average deal size of $600,000, since our digital front door is the closest deployment we have to true SaaS. Hospitality, on the other hand, represents 25% of our pipeline with an average deal size of over $1.1 million, and is seeing a lot more attention now that our smart hospitality solution is live at Atlantis in the Bahamas. For our data-enriched media opportunities, the most active industries are retail, government, and healthcare. But we're seeing a lot of new growth in food and beverage, travel, and sports 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 central to our sales strategy to scale revenue through four primary channels to comprise 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 their customers, we offer comprehensive webinars, case studies, articles, e-books, and additional training opportunities. The Funware Phenom Certified Developer Program is also available to provide on-demand courses and live training sessions remotely to learn more about math and how it helps brands better execute their digital strategy and establish a true mobile presence. In parallel, we provide full mass documentation and software portals via the Funware 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 Funcoin, but also incentivize that engagement with fund token while leveraging our mass 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 back-end functionality required to support the proper ownership of data and fair compensation with Funcoin. Looking ahead, we are well-positioned to commercialize the world's first truly decentralized data economy with the robust infrastructure required to support an Oracle network that bridges Web3 applications to Web2 data with Lite by Funware, as well as a persistent mobile-first connection to consumers through FunWallet, which is available on both Apple iOS and Google Android. As an extension of our mass 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 an auditable account of their engagement activity. New support functionality to allow 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 fund tokens. We are also focusing on token velocity and security for both FunToken and FunCoin by enabling our own Layer 2 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 funtoken.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 Fund section for the latest in user-generated content from our growing community. We plan to do for data what Bitcoin did for finance, by disremediating 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 light by fun wear 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. At double 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 to 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 fundware story more broadly and why we believe today represents a great entry point as larger investors look to build out a position in funds. 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 recently took occupancy of our new headquarters in Austin. Dubbed the Fun House, this converted historic home is the best of both worlds, giving our employees the ability to work from the office in a home. We are also using this space as an executive briefing center to showcase the best of what Funware has to offer. Of note, we expect to be fully back in the office by the end of the year. For closing remarks, I'd now like to turn things back over to Alan.
spk04: Thanks, Randall. As highlighted throughout today's call, we are all extremely excited by the ongoing scaling of our mass blockchain ecosystem and the high-performance computing systems being shipped to consumers via Lite by Funware. What it means to me is that our decade-plus of mass platform building across mobile, cloud, and big data, accompanied by our years of community engagement in blockchain and cryptocurrencies, have resulted in the culmination and convergence of massive global addressable markets and trends that can continue to act as a strong wind at our backs to further accelerate our continued growth. We expect this ecosystem to complement and supplement our core mass offering as we offer our enterprise customers additional capabilities to identify, engage, and incent their target audiences. While many corporations and individuals are newly familiar with blockchain and cryptocurrencies, both Funware and our executives have a long and distinguished history within the global digital asset community. As such, we continue to expect to be a trusted bridge for Fortune 500 corporations and governments looking to leverage blockchain, independent of the recent macro noise and market pullback associated with all global cryptocurrencies. Please look for additional announcements in the coming weeks and months ahead as we continue to enable customers to not only regain control of their data with FundCoin, but also to reward them for their engagement with FundToken, which can be purchased online with U.S. dollars, Bitcoin, and Ethereum at buy.fundtoken.com. In parallel, 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 in all that we do on behalf of the entire Funware family worldwide, I would like to now open up the call for questions through the operator. Operator, go ahead, please.
spk07: Thank you. Ladies and gentlemen, the floor is now open for questions. If you would like to enter the queue to ask a question, you may press star 1 on your telephone keypad at this time. We do ask on speakerphone this afternoon to please pick up your handset to provide optimal sound quality. Once again, ladies and gentlemen, that will be star one on your telephone keypad at this time to enter the queue to ask a question. Please hold a moment while we poll for questions. And the first question this afternoon is coming from Darren Apali. Darren, please announce your affiliation and pose your question.
spk02: Hi, this is Austin for Darren. Thanks for taking my questions. 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 make 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.
spk04: Sure. I'll give a highlight and then let Matt kind of give you a little more detail about All the token sales, we don't break out individually, but we actually do include specifics inside the platform revenues. Relative to the 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.fundtoken.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 use the tokens in our ecosystem, they have the ability to obviously use Uniswap and decentralized exchange for asset swaps. Would I separate the utility token and fund token from the security token of FundCoin? FundCoin is currently just waiting for some final opinion letters. The security token market is a brand new market. The ATS at Securitize is unique. They're doing a lot of active development. There really hasn't been a token like this that's actually been released by any company, yet alone a publicly traded company on NASDAQ or the NYSE. So right now what we're seeing is an organic use of those that are downloading the iOS and Android portfolio for FunWallet. You can get those at Google Play on one side and the Apple iTunes App Store on the other. And then once those are downloadable, you have the ability inside to either earn through engagement and behaviors like answering surveys, ultimately a lot of 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'll 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?
spk08: No, I think you said it well there, Alan.
spk00: Yeah, and you guys will obviously see in the queue here, but, you know, I did announce my prepared marks there, platform revenue for Q2 is about one, you know, just over $1.6 million versus about $1.4 million for the same period last year. So definitely some improvement there, and I'm excited about that.
spk01: Yeah, this is Randall. I would just add, you know, the last part of your question about kind of timeline and when we'll finish, you know, theoretically, not anytime soon. At the end of the day, we're not building this to, you know, try to emulate, you know, Dogecoin or something like that. You know, we're building this to sell these tokens to, you know, large brands, organizations, and institutions who want access to the features and capabilities of our platform and who can deliver those features and capabilities, you know, through FundToken. And it's kind of a unit of measure. And so, you know, this is something that will roll out over time. You know, we're not focused on pumping or, you know, hiring a bunch of promoters, 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 mass, when we think about this idea of engagement, incentivizing that engagement is, you know, 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 fight, if you will. And so this is something that we expect to kind of see come online a little bit more next year.
spk02: Got it. No, that's helpful. I appreciate it. My next question, I'm just curious on the, I suppose, what caused the sequential improvement in lights? 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, you know, moving facilities aside, what other levers can be pulled to kind of improve those margins in the hardware sector moving forward?
spk01: Yeah, 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 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? 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 an more resources than he had when he wasn't under the Funware umbrella, really making sure that we kind of teach him all the best tools and tricks of the trade in terms of marketing, and then expanding from there. We've got obviously a warehouse that's double the size. They were spilling out in their last phase, and it was not an optimal layout. They didn't have a functioning ERP system. And so it's really just taking, you know, 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, you know, any target of fun where, um, you know, too sharp, Patel is a great executive at fun, where fun, where 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. You know, 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.
spk04: Yeah, 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 light 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 in 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 Light by Sunware largely gets unaffected by that because whether there are or not lockdowns or people are or are 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 Light 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.
spk02: Got it. I appreciate it. 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, you know, 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.
spk04: Yeah, 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 work 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 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 Funware to reach the demographics of interest on mobile at scale. And so that's been a great part of that business. We touched on life by Funware. On the rest of the software business, when we deal with both our direct and indirect channels, on the direct basis, we put a list of a whole series of net new deployments And we'll have a few meaningful customer announcements that will be coming in the near term. We haven't named one, but a 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 expect it to, that there will be another 14 properties behind that. And so some of these are going to get exciting where they're not just a multimillion-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, the rest of their facilities. And the reason that's gotten a lot better is because what Randall mentioned earlier, we won Atlantis 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, You know, 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. And we've 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 doors.
spk08: Perfect. I appreciate you guys answering my questions, and congrats again.
spk07: Thank you. The next question is coming from Howard Halpern. Howard, please announce your affiliation and pose your question.
spk03: I'm with Tablish Brothers, and congratulations, guys. Another great quarter. Thank you.
spk08: Thanks, Howard.
spk03: In terms of what you just spoke about, are you also seeing any activity within – gated communities that are, you know, being built across the country for your concierge services?
spk01: Yeah, let's say, you know, one of the things, you know, Alan mentioned earlier, kind of mixed use, you know, residential, we say residential, you know, it's kind of evolved now, you know, when you think about, you know, how people live, work, play, want to do that kind of all within a working distance, 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 in Fort Lauderdale that is a customer of ours. And so, you know, it kind of really underscores something that I think continues to get lost. And I touched upon it. Alan's been preaching this forever. You know, we're not one mobile application to replace them all. We're one mobile application to rule them all. You know, 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're seeing a lot of times now is even like, you think of like, you know, Fenway Park, you know, you think of these places where stadiums are, look at what's being built in Vegas, you know, these are communities and resorts in and of themselves. And think about all the complexities that requires, you know, you have different PLS systems, you have different ticketing systems, different valet systems, Because the world, and I spent a decade in venture capital, you know, Alan's been investing forever as a successful serial entrepreneur. You know, the 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 make all of those point solutions interoperable. And that's what you're going to have to have. It's going to be table stakes. If you're going to tech enable a gated community, a mixed use facility, any sort of resorts, because they're already using 10, 20, 30 other different vendors to deliver certain specific capabilities. The beauty of Funware is we bring all that together into one, you know, if I'm quoting the military now, one common operating picture, one single sign on, one single authentication to manage everything that you need. And so that's critical in places like hospitals, workplaces, these hospitality venues that we're talking about deploying at, and then certainly mixed use. One of the things that's cool that we're working on now is actually where some of these gated communities can leverage blockchain even better. You think of membership-based facilities where maybe you have a country club membership. What role could NFTs play there? and being able to fractionalize some of these memberships. And so there's a lot of really cool things tackling how people live and how we tech enable those real world journeys. And to us, our platform serves them all equally. You know, a large residential building is no different than a large hotel building is no different than, you know, a large, you know, office building. And you lie it flat and it looks like a very large distributed community or a cruise ship. And so our software can run all of that effortlessly.
spk03: Okay. And Alan talked about, you know, the application transaction revenue bumping in the third quarter. Is that also going to be a consequence of, you know, customers joining up for the smart advocacy solutions as we enter election season?
spk04: You know, 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, you know, four to six hundred thousand dollars. We've now seen stuff where those are approaching more like low seven digits. So the cycle has 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 doubled. 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 interactives 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 to 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 and 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 deals, 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, 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 and a driver's license on one side. It could be things tied to vaccines and health issues on another. It could be tied to hurricane preparedness from another group, transportation-oriented things. So what we're finding 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're 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.
spk03: Okay. Well, I think that's great work. I'll let someone else jump in.
spk07: Thank you. And as a reminder, ladies and gentlemen, if you would like to join the queue to ask a question at this time, you can press star 1 on your telephone keypad. Once again, that will be star 1. on your telephone keypad at this time if you would like to enter the queue to ask a question. And our next question is coming from Lucas Ward. Lucas, please announce your affiliation, then pose your question.
spk06: Okay, thanks. This is Lucas Ward in for Ed Wu at Ascendient Capital Markets. Congratulations on all the exciting developments this quarter. 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 end market standpoint.
spk04: Yeah, that's a great question. And what we've actually seen is we've been hearing 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, you know, knock on wood with us, I think we've seen some other smaller companies that may have been competitors of light that were, you know, similar in size or maybe, you know, 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 decades. 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, you know, haven't been able to invest like we have, or simply have not necessarily survived a 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 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, you know, Q2 is always going to be typically less than Q1 because you have all of the holiday, Christmas, Hanukkah kind of sales that people might get gift cards or people, you know, 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 of 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're 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, you know, Q4 and Q1 are always going to be strongest. Q2 and Q3 are 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'll definitely highlight that. But we're 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.
spk02: Okay.
spk06: Thanks a lot for that color on the seasonality. Um, and I assume that, well, I shouldn't assume, can I just confirm, does your backlog support this view for the, especially specifically the hardware, the light business that you'll have a stronger Q3 and a stronger Q4?
spk00: Yeah, certainly. Hey, this is Matt. Yeah, so backlog, as Alan correctly stated, coming out of last year, Q4, there's an awful lot of backlog that builds up going in through kind of the holiday season. And we're 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's 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'll 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 blow through a lot of the – the backlog with light and get that stuff shipped out. The other reason it was very important for us to do that because we're 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, you know, potentially it could kind of be the low point for light 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, you know, August, September is, it looks like it's going to be decent. I think October is a little bit slow as people kind of wait for the, you know, kind of black Friday, November sales in December. So, you know, we'll keep, obviously we'll keep reporting and keep you all updated, but I think the, you know, it's typically, typically we're going to see a little push to get the backlog out and Q2 and then we'll kind of build it back up there throughout the rest of the year.
spk06: Okay. Thanks. 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?
spk04: Yeah, I'll take this. And then me and Randall and Matt talk about this like constantly. Right. And, And what's weird is we're talking about it from the context that we've already been through, many of us, several crypto cycles. So it's kind of interesting. The first time you go through a crypto cycle, it feels just horrible, right? Like you see these amazing highs, these horrific lows, everything's going to die. You see the Bitcoin is dead for the 500th 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. You know, right now, it seems like for this particular cycle, there's a lot of strong evidence that the low was kind of put in. You know, 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 17 cent per share loss where 12 cents 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 Gap and FASB treat it. You literally, from when you buy it, you take the lowest possible price it'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, you know, 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 get to mark to market or add that back in. So it feels to me like we had our crypto cycle, you know, capitulation event, which I'm going to call Three Arrows Capital, which was fully liquidated. And that was like long term capital management back in the late 90s, where people used way too much leverage, got really irresponsible in the way that they were doing their trading and risk management. And the end result is that it blew up and then caused contagion throughout, you know, whether it was the Voyager bankruptcy, Celsius bankruptcy, all sorts of redemptions and withdrawals being frozen, Coinbase putting up kind of an ugly set of numbers because everything just got de-levered. I think the good news of all that de-levering is the sellers got exhausted and all those positions worldwide got absolutely destroyed and liquidated. And ultimately the low point was about 17,700. So can you have more ebbs and flows? Sure. But we're over halfway to the next happening, and the next happening is literally probably going to be in the second quarter of 2024. So every single quarter that goes by, what you see is you have record hash rate. You have record security. The blockchain is working perfectly within Bitcoin. It runs 24-7, 365. It's never down. And all of these things that happen – up to and including what I call the eventual capitulation of everyone. This week, it was BlackRock, one of the largest asset managers on Earth. And they went from years ago saying that Bitcoin was a complete scam, it was a complete fraud, it was a complete joke, and basically talked nothing but ugliness about it. And then they suddenly took an intermediate step when they sort of looked at it and then just tried to tie it to criminal-oriented behavior. And now what did they do this week? They just launched their own ETF because their institutional investors globally want them to provide the product to give them exposure to Bitcoin. So the cynic in me would say, hey, whatever retail front runs Wall Street, they want to hammer the price down as hard and as aggressively as humanly possible. create carnage so that they can get into the position they realized they missed out on and wanted to be in all along. And not surprisingly, suddenly BlackRock jumps in. Suddenly prices are accelerating. And here we are. So I think that we focus on building. We're not interested in bogus pump and dump and nonsense. So our focus in crypto is very, very deliberate about doing things the right way. We focus on regulation. We focus on legality. We focus on how our ecosystem, Randall hit it right on the head when he's talking about use cases, feature sets, what do our brands need? What do they want? And can they treat us as a safe means into this new world through our platform, much like people used to go through Red Hat to safely deal with Linux and open source back in the day. So I actually think that You know, never say never. You know, Bitcoin does what Bitcoin does. And crypto, you know, Bitcoin is king. So everything else follows. But right now, I would say that most of that carnage from Three Arrows Capital is done. And now that everybody has been wiped away, that's going to be wiped away. Bitcoin resumes what it does based on all the economic structures set in. The difficulty adjustment was put in place correctly. Hash rate is at record highs. And usually record hash rate gets followed by price appreciation. So that's kind of the way we see it. And we're excited that, you know, we never like to write down things that are non-cash impairments. But at the end of the day, it's not cash. And now we took those write downs to a point where we have a massive unrealized gain. But we're just holding the same Bitcoin we were holding before.
spk08: All right.
spk06: Thank you for the detailed answer and congrats on the great quarter.
spk08: Thank you.
spk07: And there are no further questions in queue at this time. And I would now like to turn the floor back to Funware's president, CEO, and co-founder, Alan Natowski, for closing remarks.
spk04: 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 has kind of calmed down a little bit. I do think that there'll be a lot of strange activities leading into things like the midterms. 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, you know, that's going to be a challenge. You know, 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 light buyout 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're very much looking forward to a lot of announcements that we'll 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're under contract and now we're in execution mode. So thank you as always for your interest. Any follow-ups, please go to investors.fundware.com. Reach out to our IR team and we're more than happy to engage. So thank you very much and have a great rest of your week.
spk07: 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.
Disclaimer

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